Can Tom Jessop bring Crypto to Wall Street forever?

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All in cryptocurrency have a story about the time they have descended into the proverbial rabbit hole. Tom Jessop & # 39; s takes place in his kitchen.

It was around 2013 or 2014 when Jessop, then managing director of Goldman Sachs with two decades of experience on Wall Street, was fascinated by bitcoins – at the time an obscure topic in the finance circles.

"This idea of ​​this little advantage, this completely digital currency, cryptographic confidence that replaces institutional trust – all these things, I thought, were interesting," recalls Jessop.

As part of his self-education, he tried to explain the phenomenon to his wife and three children. "We ended up watching a video of Khan Academy there in the kitchen," Jessop told CoinDesk. "My youngest son at the time was 10 or 11. Nobody understood him, my little boy said" I understand him. "For an 11-year-old, he did a reasonably passable job explaining me."

Looking back at everything, he understands why people struggle with the concept, explaining:

"With hindsight why my family did not understand it: it's a sort of challenge on how you think about money, a lot of people think that money, especially fiat money, has an intrinsic value. So if you can not figure it out, it's this mental thing and you can not get to the next level. "

Jessop, however, came to that next level of understanding. And now, almost five years later, he and his Fidelity Digital Assets team (FDAS) are ready to help bring the cryptocurrency market to a new level of maturity and, eventually, liquidity.

Fidelity Investments will officially launch the new business, a trading platform created for institutional investors, in the first quarter of 2019. The product of years of research, experimentation and planning behind the scenes of the Boston asset management giant, FDAS, represents one of the moves more daring in space by a financial institution in office.

The platform promises to address the problems of the market structure that have held cryptic-curious big-money investors on the sidelines, particularly on issues such as asset custody and price discovery. Offering security for bitcoins and ether on behalf of hedge funds, family offices and the like, and to match their buying and selling offerings with a range of liquidity providers and exchanges, FDAS aims to make these institutions feel comfortable in a market nascent infamous for hack, theft and lack of transparency.

This does not necessarily mean the launch of FDAS, or other short-term institutional markets such as the New York ICE Group's futures platform, Bakkt, will immediately revive the encryption prices from their annual funk. But they are laying important foundations for the long-term growth of the sector.

"What will really have an impact is the next race, when these institutional instruments will be available," said Daniel Cawrey, managing director of Pactum Capital, an OTC (over the counter) trading company.

Jessop is perhaps unusually apt to conduct such an effort, given his pedigree. He worked in traditional capital markets, but he also invested in blockchain startups and helped manage one at a time. He sees the long-term promise in open financial networks, but has also launched blockchain technology to businesses and knows what they need to feel comfortable, and compliant, taking care of cryptographic resources.

"It has this unique combination of skill sets connecting all these areas and a true experience in bringing emerging technologies to market," said blockchain consultant Jill Carlson and veteran Wall Street colleague who worked with Jessop on the startup chain. in 2017.

The road for loyalty

Soft and brilliant, Jessop is far from the stereotype of the Wall Street executives as "human piranhas" or "masters of the universe".

"He simply does not have a bad bone in his body, and it's not a pushover, a unique combination," said Brad Levy, who worked with Jessop in Goldman's core strategic investment group (PSI). "He somehow finds a way to be ambitious and forward without hurting people in the process."

Levy attributes to Jessop the merit of helping Goldman to remodel US equity markets in the early 2000s, for example through the company's investment in Archipelago, one of the first e-commerce platforms (which eventually merged with New York Stock Exchange).

"Tom has played an important role in everything that has been created from a Goldman perspective, benefiting the market and us at the time," said Levy, now CEO of MarkitSERV and global lending manager at IHS Markit.

In mid-2010, Jessop was helping to pool Goldman's investments in fintech startups, including a small but important symbolic stake in one of the longest-running exchange services, Circle Internet Financial. "In 2015, there were not many big bankers who invested in space companies, so it was noteworthy at the time," said Circle co-founder Jeremy Allaire.

Carlson, who worked at Goldman as a bond trafficker at the time, agreed that taking a mail at a bitcoin startup was a bold move for that era.

"It's easy to forget it now, but only a few years ago, using the word" bitcoin "or" blockchain "inside a bank made you raise your eyebrows or people looked at you with a puzzled look, like:" 39, is this thing? You are talking? "He said." Now there is this stereotype of the person on Wall Street who bought it in bitcoins, but when Tom entered the space, making the investment in Circle, it was by no means the case . "

Jessop himself seems more humble than anything else when he speaks of this period, when he met the first space evangelists as the founder of the Digital Currency Group Barry Silbert, and spoke in groups with the likes of Balaji Srinivasan of the venture capital company Andreessen Horowitz (now the CTO of Coinbase).

"It was crazy, trying to learn at the same time that these people, who were ahead, were doing interesting things," Jessop told CoinDesk.

In April 2017, he was no longer content just to invest and learn from startups, he was part of it, becoming the president of Chain. That company, founded by Adam Ludwin, started in 2014 as a provider of bitcoin developer APIs, but repositioned the next year as a blockchain technology provider to businesses. "Visa was a great customer, it was exciting because Visa had something in production," said Jessop.

Taking a step back, the conventional wisdom during the 2014-2016 bear market was that digital currencies running on public networks did not go anywhere anytime soon, but that companies could leverage technology to create their own private versions.

But the year he joined Chain, the crypto-market has returned to roar, and the zeitgeist has again moved away from corporate controlled blockchains in favor of the public ones that feed digital tokens and tokens. So did his new employer.

"The founders decided to do something more in public space," said Jessop. "In the nine months to a year they completely reversed the business model". (The transformation became apparent to outsiders in September 2018, when Chain was acquired by Lightyear, a for-profit corporation that built itself over the Stellar public protocol.)

That was not what Jessop had signed up for, even if that did not mean he was against public blockchains. "There is no need for imagination for a private-against-public," he said. "Everything we are doing here [at Fidelity] it's public, and I love it. And I've always had a keen interest in both. "But on Chain," I did not think I could be particularly useful for them in the way their business was directed. "

While Chain was moving in a new direction, Jessop started talking to Fidelity, and joined the company in January 2018 as head of business development. It was a job similar to the one he had in Goldman, looking for M & A, venture opportunities and partnerships.

But very soon, Fidelity will give him a bigger challenge.

It's not your grandfather's money manager

To understand the significance of this challenge, it helps to remember how Fidelity, the fourth asset manager in the world, has positioned itself as an unusually encrypted company.

For years, Fidelity has studied bitcoins. Not only "the blockchain", which had been the area of ​​politically correct interest for regulated and reputation-conscious financial institutions, but also for bitcoins. This curiosity derives from a wargame exercise that took place in 2014.

"We were trying to imagine what potential futures could be that we were not questioning, but just trying to prepare and imagine the possibilities," recalled Katie Chase, Fidelity's senior vice president, involved in this scenario -planning discussions. "One of these was" capital markets without friction "."

"Frictionless" has described bitcoin, or at least some aspects of it. Transactions in cryptocurrency have generally been resolved in minutes rather than on bank transfer or securities transactions (and weeks or even months for instruments such as syndicated loans).

During the purchase or sale of bitcoins through exchanges as the now defunct Mt. Gox was a cumbersome process for the first users, once on-board, they could do value zapping around the world instantly. (Well, almost instantly, we'll talk more about it soon.) Imagine Autobahn … except with really poor ramps and ramps.

Was this the "direct process" that financial professionals had long dreamed of? The strategic planners of Fidelity thought it was worth investigating.

The company began experimenting with crypto in the Fidelity Applied Center for Technology (FCAT), a research and development laboratory. Some of the early studies have had unfortunate results, such as allowing employees to buy food with bitcoins at the company cafeteria. Chase remembers an embarrassing moment in which an elderly manager has kept the thread of the situation trying to pay for a snack with the cryptocurrency.

"The cashier was trying to wait for the transaction to end, which may take some time, instead of giving him his banana and assuming the transaction would come," he said. Unlike a credit card transaction, there is no intermediary in cryptography to guarantee any payment. So even if a trader will not have to wait days to see the money, like with Visa or Mastercard, it may take 20 minutes to get confirmation that the transaction was registered in the blockchain rather than an immediate authorization.

Friction at the point of sale aside, the employee pilot taught the FCAT another lesson. "People do not want to spend their bitcoins," Chase said, because it tends to appreciate over time. "You heard all these stories about how someone transferred $ 1 to their friend," Yes, good work. "They come to realize that that $ 1 in terms of today is a lot more dollars."

Although this does not bode well for bitcoin as a daily currency, it has highlighted the case of the asset as "digital gold", a long-term value reserve for those willing to bear volatility.

Fidelity's explorations continued. In 2015, a blockchain incubator was centrifuged inside FCAT. Researchers have begun to extract bitcoin, an activity that continues today, according to Chase, who now manages the incubator. The charitable arm of Fidelity began to accept encrypted donations.

And then there was the emerging party: in May 2017, Abigail Johnson, president and CEO of Fidelity, spoke at the Consensus 2017 of CoinDesk. "I love this stuff," he said, sporting a "Vote Nakamoto" pin, a humorous reference to the pseudonym creator of bitcoins.

The fact that Fidelity is a private company (49 percent belongs to Johnson's family) helps to explain why it can push the envelope in this way. Compared to the pressure to show the growth of profits in the short term quarter after quarter, it can invest in cutting-edge projects that may not be fast enough to meet the expectations of Wall Street analysts.

Crypto is not the only example of Fidelity's adventurism. Jessop notes that Fidelity was one of the first companies to offer online trading in 1993, via the Internet but not on the World Wide Web, which was still in its infancy. "There's a reinvestment in innovation here that I think is unique," he said.

In particular, Fidelity has not participated in any of the blockchain consortia of private companies, such as R3 or Hyperledger, to which other banks and finance companies have joined.

"To date, technology is not mature enough to be particularly interesting in the securities space," Chase explained, citing scalability and privacy issues. She said:

"Ultimately, we believe that the future is in open books without authorization." Right now, technology is not ready for us to carry out financial transactions on open securities without authorization. "

All in all, therefore, it was no surprise that the first company to graduate from the FCAT blockchain incubator was not an esoteric back-office game, like using a shared ledger to track votes or audits of proxy. Instead, Fidelity decided to build a business around what is probably the most successful blockchain application so far: cryptography trading.

The business type

Not long after Jessop arrived at Fidelity in January 2018, he was asked to direct the new business, which would fill the gap that the team had identified.

"We have not seen a quality institutional offer in the market," he said. "People are trying to be institutional, but not the way institutions want to consume that service."

Furthermore, Fidelity has seen the institutions as the most appropriate investor category to focus initially. "Digital resources are an emerging class of activity, [with] much volatility, "said Jessop." Many things have yet to be proven. Institutions are more sophisticated in terms of how they think about this stuff. "

The business plan was kept under control for most of 2018, as Jessop recruited employees (his team is now strong at 100) and got the portfolio and other technology that the incubator had already developed ready for production.

"When you use things internally, you do not really need imaginative and intuitive front-ends, but when you have a customer who is about to interact with the system, you have to design UI / UX," he explained, by way of example. "So it's really just the production of these technical components and objects we were already using internally."

After the presentation of the FDAS in mid-October, some of Wall Street have scratched their heads that Fidelity, better known as a consumer financial brand, was urging the institutions. "People see us as a wealth manager and a personal wealth manager, but we have an institutional business," said Jessop. "We have a capital market, we serve about 13,000 banks, broker-dealers, funds, so we have that DNA."

And with this DNA, FDAS aims to bring to market a level of sophistication never seen before by cryptographic service providers. Take, for example, your custody offer.

As for the context, the blockchain industry has already developed innovative methods to safeguard resources, such as cold storage (keeping the private cryptographic key in an offline portfolio, on a device disconnected from the Internet or a piece of paper locked up in a safe) and multi-signature wallets (which can be programmed to request more than one private key to free funds).

To some extent, these innovations are born out of necessity, since cryptography is a good carrier, more like money or jewels of stocks or bonds. Knowledge of the private key means control of the asset, and if a key is compromised and the thief transfers money from a wallet, it is gone forever.

According to Jessop, FDAS will marry cryptographic security methods with processes and procedures that business customers expect, things that Fidelity does naturally in its traditional custody business. "Think of another custodian holding your personal coins on Xapo or Coinbase, there's only one login, institutions do not want this," he said. "Institutions want something called" creator-controller "- the separation of functions in which two individuals within an organization must sign a transaction.

Consider it as the corporate precursor, pre-crypto multi-sig. "You might be able to say," I want to transfer bitcoins from a wallet, but guess what, there's someone else in your organization who has to approve it electronically before it can happen " , Jessop said.

Another potential differentiator: By taking advantage of Fidelity's insurance relationships, FDAS has obtained an insurance policy against theft or loss of the digital assets it will keep for customers. This coverage is notoriously scarce at this time, partly because the insurance industry does not have much of a track record to continue to subscribe to risk. As Cawrey of Pactum said: "Any insurance policy in the crypt is tailor-made".

Jessop would not name the carriers or say how much coverage FDAS has secured, but said it is significant. "Based on our knowledge of industry capacity when we asked for insurance, we were pleasantly surprised at how much we got," he said.

However, Jessop was clear that Fidelity's balance sheet would not represent an additional barrier to losses, since FDAS is capitalized separately from the parent company, "an autonomous business unit". This is also one of the reasons why FDAS is pursuing state licensing rather than being a swine on Fidelity's federal broker-dealer license, Jessop said.

A slow burn

From a commercial point of view, Jessop emphasizes that the FDAS will not be an exchange. Rather, it will act as an intermediary, helping customers find the best price available through a highly fragmented global market.

"If you are an institution now and want to exchange digital resources, you have to open accounts in various exchanges and finance these accounts," he explained. "The concept of a consolidated tape does not exist, I have to interrogate these exchanges separately to see who has the best price and then run".

To solve this problem, FDAS will initially allow customers to send purchase or sales orders and ensure that liquidity providers compete for their business.

"Our goal is for liquidity providers to mention tight markets around some benchmarks or indices," said Jessop. "So customers feel they get a better price experience through Fidelity."

And over time, it can "cross" orders, that is, combining the order of one investor's client with that of another, he added, even if "this will not happen until there is a critical mass of trading activity. on the system ".

This statement implies the assumption that critical mass will not be present on the first day. So it is repeated: anyone who expects the prices of bitcoin or ether to go "on the moon" in the first quarter simply as a result of the fact that FDAS (or Bakkt) arriving online risk being disappointed.

To put things in perspective: Allaire says that Circle has signed 1,000 institutional clients in 2018, and while most have started to exchange crypts, many are "waiting and getting ready".

"The nature of the institutions involved today is not BlackRock or pension funds or large wealth managers," Allaire continued. Rather, players to date have been smaller capital wells, such as hedge funds and family offices.

So while the Fidelity platform "will be useful" to engage larger investors, "they are a bit ahead of the market," said Allaire. "It's not that the asset managers are banging the door to get a bit of bitcoin".

Apart from these warnings, it is still fair to say that the concept of FDAS is a milestone for cryptocurrency.

"Loyalty was one of the most real and exciting announcements of 2018," Carlson said, adding:

"The fact that a mainstream, retail but large-scale financial market platform is turning into a crypto in such a serious way – not just a concept demonstration, not just plunging into a finger in the water, but diving deeper – is a huge leap and hopefully a testament to the fact that this space has now grown and become an industry and is here to stay ".

Caitlin Long, a former Morgan Stanley executive, also turned bitcoin and blockchain supporters who voiced concerns that Wall Street will ruin cryptography by "funding" it through practices such as reipotidation (essentially, creating more claims on the same resource), he said which is less a concern for Fidelity.

"Loyalty is more likely to pay attention to these problems than sell-side firms … because Fidelity (and other investment mutual funds) are about to lose these practices in the securities markets", said Long. "So I'm more optimistic that Fidelity will do it the right way."

2019 and beyond

In December, FDAS had signed its first investor client. Jessop said the platform will be launched in the first quarter of 2019 and will spend the first half of the year "running the richest pipeline opportunities, the things we've been cultivating for a couple of months", making sure that "everything works and we we are shrugged off, so to speak.

Regarding the revenue model, Jessop said that FDAS will charge a commission on the negotiations (no disclosure, since it will not take a leading position) and a commission based on assets in custody.

To begin, it will facilitate the trade of bitcoins and ether, and then selectively watch adding the rest of the first five to seven coins by market capitalization. In particular, the other reason why FDAS will not seek a broker-dealer license, according to Jessop, is that it does not need it, since it will not deal with securities – suggesting that the tokens come from initial coin offerings. (ICO) who are at risk of being named securities by regulatory authorities will not be supported on the platform for the foreseeable future.

But that does not mean that Fidelity does not see a bright future for the representation of securities with tokens on a blockchain.

"We foresee a day when people will exchange stocks, bonds, real estate, private securities in tokenised format," Jessop said. "It's not just about getting this universe parallel with these new resources, but applying the underlying technology to the existing financial system, which is incredibly powerful."

He noted recent transactions in which a Colorado hotel and a World Bank bond loan were made tokens. "We are closely observing this trend," he said. "This is the maximum expression of what we have built and frankly has much more applicability than just bitcoins, ether and other things".

Five years later, he predicted:

"You will have an interesting mix of resources that exist only because technology has allowed them to exist [and also] other resources that want to take advantage of the technology. We will keep all these things going and develop other types of services that make us look more like a complete institutional brokerage service for this asset class. So we think this is actually a new type of brokerage business. "

Meanwhile, Jessop advises blockchain industry observers not to put too much stock in the stagnation of 2018 prices.

"It's very easy to over-index what's going on in the market right now from a price point of view," he said. "If you look at the absorption of [bitcoin scaling project] Lightning, if you look at the attitudes of institutional investors in this space … things are probably more robust than the casual observer would see. "

For example, he noted that venture capital funding for industry in 2018 reached $ 3 billion, almost three times the previous year.

"There's a lot more smart money coming to the field, many more intelligent people in the academic world," he said.

And demonstrating that his passion for cryptography is far beyond lucre, Jessop expressed wonder at the achievements of community open source software developers.

He concluded:

"It's fascinating, it's like the power of the crowd." In a sense, it's like massively crowdsourcing innovation around what money is and could be or what resources could be, it's really exciting if you tune in for a while "From the market data terminal."

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Original art of HyperDragons / MixMarvel (@mixhyperdragons)

Photo by Marc Hochstein for CoinDesk