Enhancing Institutional Digital Asset Trading with Clearing and Settlement Services

Fidelity Digital Assets will work with TP ICAP to deliver clearing and settlement capabilities.

by Terrence Dempsey



Over the last decade, the digital asset market has seen impressive growth, and the diversity of market participants continues to grow. As one of the first traditional financial services firms to form an entity dedicated to this new asset class, it has always been Fidelity Digital Assets'SM goal to combine the best of traditional capital markets with the innovation of blockchain technology and decentralized assets. To date, we've built a secure and integrated custody and execution platform for digital assets trusted by some of the largest institutions in the world. Recently, we've also expanded to offer collateral agency services, providing clients with the ability to access a cash loan from a third-party lender backed by bitcoin held on our platform. 

This week, we are proud to continue to contribute to a more robust digital asset infrastructure in launching third-party clearing and settlement capabilities with TP ICAP, one of the world's largest inter-dealer brokers. We are collaborating with TP ICAP to develop a new trading model that will enable clients to buy bitcoin with USD stored on our platform via TP ICAP’s new digital asset platform and to execute sell orders through TP ICAP while their digital assets remain in Fidelity Digital Assets’ cold storage, pending a secure, post-trade settlement process. Our third-party clearing and settlement services will enable clients to directly access institutional-grade, regulated trading platforms without compromising the security of their assets.

Inefficiencies of Current Digital Asset Market Infrastructure

While there has been significant progress over the last several years, the current digital asset trading infrastructure still lacks the maturity of traditional markets. There is also a lack of consistent regulatory standards governing customer protection, liquidity, and best execution. These two factors have historically influenced institutional investors’ willingness to make significant allocation to bitcoin and other digital assets.

Today, most institutional digital asset trading occurs on digitally native exchanges or over-the-counter (OTC) desks. Given the grass-roots beginnings of the digital asset market, most exchanges were built for retail traders making relatively small purchases, leading exchanges to require pre-funding, and in many cases act both as a custodian and execution platform. While these platforms have an important role in the digital asset ecosystem, both have inefficiencies and expose investors to potential risks. For one, most popular exchanges custody billions of dollars’ worth of crypto assets on platform, making them frequent targets of hackers and vulnerable to multiple risks. A portion of assets held on exchanges is often stored in hot wallets to make trading and moving digital assets faster and more efficient. However, hot wallets are connected to the internet and, therefore, more susceptible to cyberattacks. This custody practice can become dangerous to users if the exchange fails to return lost funds to customers impacted by a hack. Depending on the user agreement, businesses may not be required to return lost funds to customers.

Additionally, liquidity in the digital asset market is highly fragmented across hundreds of exchanges, market makers, and other liquidity providers. This fragmentation may be partly because digital asset service providers are not required to adhere to National Best Bid Best Offer (NBBO) regulations, which in traditional equities markets is the responsibility of a broker to execute customers' trades at the best available price. In the absence of clear regulations, some service providers have built in-house smart order routers that connect multiple exchanges to help improve liquidity and depth of order book. Still, the overall digital asset market lacks the integrated and robust infrastructure of traditional equities markets, leading to siloed liquidity and opaque pricing.

To access sufficient liquidity and the most competitive pricing, investors may need to open multiple accounts on different platforms. This process can be expensive and time-consuming because users need to manage funds custodied across multiple platforms, varying deposit limits, maximum trade sizes, and other potential trading or capital constraints. Additionally, users need to continually rebalance or aggregate assets to or from their custodial solution. 

Fidelity Digital AssetsSM Clearing & Settlement Services

Fidelity Digital Assets' clearing and settlement services will help address the issues described above and enable more transparent, secure, and efficient digital asset trading solutions for institutional investors.

Through this capability and relationship with TP ICAP, Fidelity Digital Assets will act as an integrated custodian for trading platforms. Clients will deposit funds in an account with Fidelity Digital Assets, and we will provide real-time balances to the trading platform. Clients can trade throughout the day on the integrated trading platform, using the balance held within their Fidelity Digital Assets account while their digital assets remain in secure cold storage on our custody platform. Fidelity Digital Assets will settle transactions periodically and update client's balances in their account. Not only does this service minimize the security risk of hot wallets, but it also reduces blockchain settlement risk by removing on-chain transactions. With this arrangement, users do not need to move their assets from exchange to custody or vice versa, which will provide a familiar experience to that of institutional investors with traditional markets.

The Fidelity Digital Assets custody platform adheres to a robust combination of operational, cyber, and physical controls to keep clients’ assets and personal information safe. We utilize an omnibus custody model which spreads clients’ assets across multiple private and public key pair groups, eliminating the risk of a single point of failure. The omnibus custody model also helps lower transaction fees and enables faster settlements.

Our integration with TP ICAP can also offer existing Fidelity Digital Assets’ clients an array of unique benefits. As a large inter-dealer broker, TP ICAP is uniquely placed to add value to clients by providing access to large pools of liquidity and competitive pricing. TP ICAP’s non-custodial liquidity platform will provide a scalable solution to support digital asset trading, helping to directly address fragmentation in the digital asset market. Additionally, TP ICAP is a well-recognized and highly regulated institution with extensive experience building new markets across a diverse set of asset classes. In working together, our institutions collectively bring to the table a blend of digital assets and traditional capital markets expertise.

The Next Evolution of Digital Asset Trading

Fidelity Digital Assets continues to create solutions to help institutions participate in the digital assets market. We build our products to exceed the highest standards of institutional investors and regulators, bringing the best of traditional markets to this emerging asset class. We are excited to work with TP ICAP and other firms in the future to help develop critical infrastructure for the digital assets market. Cooperative product offerings like this give clients the option to use best-in-class services across the dimensions of their business while still enabling them to maintain assets custodied with Fidelity Digital Assets. We hope that this work will help make digital assets more accessible to a wide range of institutional investors.

The information herein was prepared by Fidelity Digital Asset Services, LLC and is for informational purposes only and is not intended to constitute a recommendation, investment advice of any kind, or an offer to buy or sell securities or other assets. Please perform your own research and consult a qualified advisor to see if digital assets are an appropriate investment option.

Digital assets are speculative and highly volatile, can become illiquid at any time, and are for investors with a high-risk tolerance. Investors in digital assets could lose the entire value of their investment.

Fidelity Digital Asset Services, LLC does not provide tax, legal, investment, or accounting advice. This material is not intended to provide, and should not be relied on, for tax, legal, or accounting advice. Tax laws and regulations are complex and subject to change. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

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Services provided by Fidelity Digital Asset Services, LLC, a New York State-chartered, limited liability trust company (NMLS ID 1773897).

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