Base Layer: The Past And Future Of Fidelity

Tom Jessop, the head of Fidelity Digital Assets, joins the Base Layer podcast to discuss the 5+ year history of Fidelity's interest and experimentation in crypto and blockchain, leading to their entry into digital assets with their current platform. Tom came to Fidelity after 16+ years at Goldman Sachs with time spent at Chain prior to making his current move. Tom and host David Nage discuss Fidelity’s recent study which shows institutional investor adoption and gaining interest in the asset class.

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David Nage
This is Base Layer, brought to you by Arca.

David Nage
I am your host, David Nage. This is Base Layer - where institutional investors come to learn about crypto.

David Nage
Welcome back to Base Layer, this is David, and this is your new episode. I have Tom Jessop, the Head of Fidelity Digital Assets, on the show with us today. This is our special show and a great show. Tom and I talk about what Fidelity has been building over there for the last few years. We talk about the actual time this all started, which was around circa 2014 and '15.

David Nage
Fidelity and the team have also spent a lot of time writing about the history of digital assets and about crypto, going back to DigiCash and Hashcash. There's a lot of understanding of the rich history and the work that has gone into actually getting us to this point today.

David Nage
We talked about their services for custody, and for other trading transactions, and we talked about the rational, and the roadmap, if you will, for going from beyond bitcoin to other potential crypto assets, which they're taking a look at right now. We talked a little bit about the possibilities and the feasibilities of bitcoin going to zero because some family offices and institutional investors still think that there is a probability of that happening, a possibility of that happening.

David Nage
So, this is a great conversation. You're really going to enjoy it and I think you're going to learn a lot from Tom and from what they're doing over at Fidelity.

David Nage
Remember, nothing on Base Layer is investment advice, so please do your own research, and on the flip side, you're going to hear the conversation with Tom. Enjoy.

David Nage
This is David and this is your new episode of Base Layer. It is my pleasure to have Tom Jessop, the Head of Fidelity Digital Assets, with us. If you don't know what Fidelity Digital Assets is, this is going to be an enlightening moment for you because this team and this group has been working on a solution to a big problem in custody for institutional investors. Tom has years of experience prior in institutional asset management at places like Goldman, and so Tom, if you could, tell us a little bit more about yourself, tell us about Fidelity Digital Assets, and tell us what you're building there.

Tom Jessop
Great, thanks for having me today, David. Yep, so I enjoyed Fidelity about 18 months ago. I had done a brief stint at an enterprise Blockchain startup called Chain, and prior to that, 17 years at Goldman Sachs where a lot of my focus was on investing in fintech companies and doing–call it native business development, mostly in the institutional finance space. Really enjoyed that and I've always really lived my career at the intersection of finance and technology.

Tom Jessop
Actually, when I was at Goldman Sachs, I had gotten interested in bitcoin and blockchain and had done some work there, which I'm happy to talk about, but when I came to Fidelity 18 months ago, it was a really wonderful opportunity for me to take some of my expertise, but also my passion and interest in this space, and apply it to work that was already in progress at Fidelity and had been in progress for many years, really taking a lot of basic research we'd been doing in the space and assembling that into a business, which we now call Fidelity Digital Assets.

David Nage
One of the things that we like to do on the show is talk about not necessarily the when bitcoin, but the why. The next question is why, in your discovery of bitcoin and blockchain, what about the underpinning technology, what about the innovation really struck you and said, "This is where I want to spend a good amount of my time professionally"?

Tom Jessop
Yeah. It was probably 2014 and I had read an article that someone had sent me. Ironically, it was a scanned article from a magazine, which seems kind of interesting given the subject matter. But my background is I was an economics major undergrad, I flirted with being a philosophy major until my dad asked me to do something slightly more commercial with my life. So when I read this article and did a bit more research in the space, I thought bitcoin, at that time, and the underlying blockchain was a liberal arts dream subject because it had equal parts economics, political theory, game theory, behavioral aspects.

Tom Jessop
I was just attracted to the subject matter, more from an intellectual standpoint, but the more that I learned about bitcoin and the blockchain, I really started to think about the potential implications for finance, not so much the idea that you would potentially disintermediate financial institutions or fundamentally refactor how they work, but that the technology itself could be a force multiplier or an enabler in a number of domains: one, financial inclusion; two, thinking about the cost structure of finance, particularly institutional finance where we can trade something in micro seconds at very low cost, but it still takes days, and capital, and reconciliation and other things to settle that transaction.

Tom Jessop
So this whole idea that this innovation could be applied across a broad set of domains, and really attack a number of things that can be fixed in finance, or perhaps bring finance into areas that the cost structure, and call it the state of the art, was unable to take it.

David Nage
Right. We'll talk about the unbanked. We'll talk a little bit later about Libra, but one of their notions in the writings is working with the unbanked and having 2 billion daily active users, many of which are unbanked. So this notion of how crypto and blockchain can bring those people into the system, and also, it's interesting you talk about payments and overseas transaction.

David Nage
We recently had Michael Dunworth from Wyre on the show talking about how transactions, it'd take three days if you were a retailer here in the states and you had a supplier in China or in India or other places throughout the world, and it would be about T+3 for those transactions to finally clear, and then the supplier would finally send those goods. So speeding up delivery processes, and also, the costs as you alluded to, dropping those costs on transactions down to a fraction of what they were. So, really interesting.

David Nage
Let's learn a little bit more about Fidelity Digital Assets and talk about what you guys have built there from a high level, institutions and solutions for new asset class. Talk to us at a high level about what you guys have built, and then we'll go into the history of actually how this all came about.

Tom Jessop
Yeah. I think that the long-term vision or a guiding principle is, coming back to what I said earlier, we believe that this technology is effectively a new medium for assets and can facilitate financial transactions that currently exist, but do it better, or perhaps facilitate new types of transactions.

Tom Jessop
What we really want to build at FDAS, or Fidelity Digital Assets, is really, an institutional grade platform brokerage capability for all types of digital assets, starting at the base layer with custody, also providing execution services, which we can talk about. As you probably know and perhaps some of your listeners, the crypto market structure, in terms of how investors interact with it, is fundamentally different from the market structure that they're familiar with around listed equities, as an example. We're trying to bring a traditional institutional paradigm to how investors interface with the market. It's incredibly important, and in our early days of the launch, something that really resonates with customers.

Tom Jessop
And then, in terms of our growth path, it really is adding more assets. We're certainly very interested in native issuance of securities or tokenization, which I think will come in the future, but obviously, is something that our clients are very interested in; and then building capabilities around those assets to increase the utility of them on our platform. At some point, think about lending, think about margin, other things that are artifacts of traditional finance that are still being developed for digital assets.

David Nage
Really interesting. We'll dig into a little bit more of those pieces in a few minutes, but we're going to dig into the history because the history is rich, and we'll talk about the circa date of when Abby Johnson commissioned Fidelity Labs around 2014 and '15, but I want to make this a very specific point:

David Nage
The fact that Fidelity, and the fact that I'm talking to you, Tom, Fidelity, give or take, has about $7 trillion in assets under administration, and those numbers might be a little old, but Tom, obviously you can give us an up-to-date if you have, but the fact that we're talking to Fidelity and we're talking to Tom right now and they've spent the years to experiment with this and get a product to market for the crypto space, for the digital asset space, is something that I hope resonates with the listeners. I want to talk more about this history.

David Nage
From your Medium post, "Some of the experimentation bore insights that helped us reprioritize and select the next batch of trials, but others did not prove out as we'd hope. Regardless, we were listening to the marketplace and specific opportunities were beginning to emerge." So again, if you can walk us back to the history, five years, six years, whatever it was, talk to us a little bit about the history and talk to us a little bit about what kind of experimentation occurred there and what did you learn?

Tom Jessop
Yeah. You know, one thing about Fidelity, which I learned after being here, which I think is pretty amazing is this super rich history of innovation. As someone who was entering the workplace in the '90s, the advent of the web, I had seen something that, even before the web, Fidelity had distributed an online trading system on 3.5" floppy disks to customers. So even before the web existed, the company was innovating in things like online trading.

Tom Jessop
There's this incredibly history of innovation and I think when we start thinking about bitcoin and blockchain, it really is a continuation of that legacy, and it really started around 2014. As I understand it, there was a discussion amongst senior management about the fluidity of finance or how to make finance more fluid, there was a discussion around blockchain, and the organization started doing some basic research in something called the Fidelity Center for Applied Technology. This is an area of the firm where currently, as an example, the organization's looking at AR, VR, artificial intelligence, other types of things, really looking at basic research without perhaps a commercial objective in mind. Back in 2014, I think that was really the spirit with which the organization dug into the blockchain.

Tom Jessop
For me, what was fascinating, I was at Goldman at the time, and I personally was beginning my journey, and a couple of months later, had started making investments in the space, and I felt like I was one of the few people on Wall Street at the time who was focused on it. There wasn't this upswell of collaboration and engagement amongst financial institutions. To think, at that time, that Fidelity was mining bitcoin, and running nodes of the blockchain network, and hiring people who had early experience in the space, to me was really mind-boggling.

Tom Jessop
When you think about Fidelity Digital Assets, we didn't just decide a year ago we wanted to build this business. A lot of the core components and the thinking and the expertise had really been developed over the prior four plus years. We experimented with things like mining, as an example; we experimented with pilots in the cafeteria allowing employees to buy things with bitcoin. You've heard about the bitcoin pizza, and lord knows what that costs in present value terms. We had the bitcoin bagel. We had people buying stuff in the cafeteria. It was the most expensive bagel, perhaps, they ever purchased.

Tom Jessop
We had all this rich experimentation, all the while, debt investors and others were getting more sophisticated about the technology, and the assets, and their role in finance. Those things converged at a point last year, actually early '17, where we felt it was time to take this learning and push it out commercially. I think that's, perhaps, what really distinguishes the story here is we've been active in the space and spending money on the space for several years.

David Nage
Let that resonate with people. I want that to be a hard pause and I want people to realize that this was not a reaction to bitcoin prices. This was not a reaction to 2017 where the all-time high of $21,000 was set. This was going on prior to that, and I think that's really an important note that people need to really let that sink in, that this was something that the business, the company itself was investigating years prior to that. I love that. I think that's a really important narrative.

David Nage
Some of the other things that you guys have written about, which I love, and giving a historical context to family offices and to other institutional investors, is this history. A lot of people, it was funny, I was talking to a family office principal a few days ago, and I told them that bitcoin was around for 10 years, and he actually was surprised. He said, "Really, it's 10 years?" I said, "Yeah, it's 10 years."

David Nage
There's this notion that a lot of people don't understand the history here, and a lot of people think that this Satoshi Nakamoto person, persons, whatever you want to classify it as, kind of came out from the financial crisis in '08, '09, and we had bitcoin, but if you actually look at the history, and you guys have, and I love that, we talk about people like David Chaum, and Nick Szabo; we talk about things like DigiCash, and Hashcash. I think it's really important to continue educating institutional investors about this.

David Nage
I would love to hear your thoughts as you've obviously done your homework, you were investing in the space early on too. Talk to us about the history. Talk to us about it, give us a little more context. Again, you talked about the history of Fidelity and the build-out for Digital Assets right now; talk to us a little bit about the history that you guys wrote about too. I think that's really important.

Tom Jessop
Yeah, I mean, I think throughout technology, I guess my observation is that there's always a time and a place. I think it just so happened after 2008 with the bitcoin whitepaper, it really galvanized a tension in an area of technology or cryptography that had been fairly rich in terms of experimentation well back into the '90s and perhaps sooner.

Tom Jessop
It really was this evolution. Everything that is represented in the ecosystem today calls back to the work that was done by those individuals, and their legacy is really a part of the space that we're operating in today.

Tom Jessop
I actually have a slightly longer historical perspective because I was trying to think about this idea of a scarce digital asset, truly native digital money, and if you actually think about money as a technology, there really have been reasonably few innovations over time. Obviously, moving from barter to some form of fiat, coins is an example in the 600s in Turkey, I believe, to double-entry bookkeeping in Renaissance Italy, this idea that you can maintain a set of ledgers that would allow you to extend credit and maintain a balance of payments between individuals. Those were real innovations.

Tom Jessop
And then you think about where we've gone from there, innovations in finance have largely been messaging instructions between financial institutions; whether it's a PayPal or a Venmo, at its core, you're telling folks to update ledgers. And then you have this really interesting and rich idea around digital assets and cryptocurrencies where these things exist solely as artifacts on a network that are controlled cryptographically, and then you start overlaying decentralizations, trustless exchange, delivery versus payment. It feels, to me, like if you go over a longer arc of history, we may look back and say, "Wow, this is quite a seminal event in financial history writ large, not just a seminal event in the evolution of digital cash going back to the '80s or '90s."

Tom Jessop
I don't know if that makes sense, but I think there's a broader arc here that's pretty interesting.

David Nage
It does. When you start getting into digital assets and crypto and blockchain, you become a historian. You start reading about the history of money if you didn't do that prior, and you start reading about distributed systems, you read about how all of this has been happening over thousands of years and there's been different iterations. Telling my son that, at a point in time, people used to barter with wheat and with grains and with barley, that's how we used to pay things, and that's how the people used to actually pay for things and exchange goods. There's this big notion of the evolution of money for thousands of years, so I love that narrative that you guys wrote about.

David Nage
Talk to us more about the product today, so offline vaulted deep cold storage, multi-venue trade execution capabilities powered by a proven order routing and matching technology, and dedicated client support team available 24-7. Tell us more about each one of those.

David Nage
We've had people like Diogo Monica from Anchorage talking about the difference between hot and cold storage. If you guys want to have a primer on that, you can also listen to that episode, but talk to us a little bit more about this notion of deep cold storage, multi-venue trade execution, and obviously, the order routing that you guys have been able to come up with.

Tom Jessop
Yeah. On the cold storage side, I think as maybe not to bore your listeners, we basically have a hot and cold, deep cold, structure. As folks probably know, the hot wallet is connected to the internet we maintain. It's not a feature in our service. Clients cannot elect to keep assets in the hot wallet. We really use it as a staging mechanism for transfers that are authorized by the client. It's really more of a liquidity management layer than it is a feature.

Tom Jessop
And then we have cold storage and then deep cold storage. The difference is that in deep cold storage, we distribute keys geographically across a number of locations. The SLAs in terms of moving things out of deep cold versus cold are different. We built a whole set of features around that.

Tom Jessop
I think most importantly, maybe abstracting away from the storage for a minute, are the controls that institutions require. As an example, if I were to hold my coin personally at a vendor, I have a username and password. I can log in, I can move coin. What clients actually want is they want maker-checker, they want levels of approval hierarchy on their side. When we set up the client, it's never the case that a single individual at the client can move those coins unilaterally; there's an escalation and approval process, which needs to occur on the client's side, and then there's an analogous process on our side to make sure that all this movement is double and triple-checked.

Tom Jessop
We've built things into our procedures and our infrastructure, quite frank of it, that take a page out of the work that Fidelity does with other institutions outside of crypto. We have a very large institutional business. I think we serve the needs of north of 10,000 banks, broker dealers, hedge funds, and others, so we've taken a lot of that expertise and we've applied that to this business.

Tom Jessop
From a trade execution standpoint, coming back to what I mentioned earlier, the challenge for traditional institutions thinking about crypto is that if they want to find best price in the market, it probably looks like them having to open up accounts at multiple exchanges, fund those accounts, and then effectively manage their cash across those different venues in terms of finding the best price. It's administratively inefficient, it's capital intensive, and it potentially introduces risk into their business process by having cash at a multitude of exchanges.

Tom Jessop
Contrast that to listed equities where you would typically have a broker who would maintain your accounts, and that broker would give you access to any number of exchanges or ATSs in the space for purposes of finding you best price on a single screen at which you can execute, and that's effectively what we're doing. We've leveraged some technology that powers our capital market's business, we've repurposed that for digital assets. A client can come to Fidelity, can submit an order. We have competing market-makers and venues, we collect best bid and offer, we display that to the customer, they can execute. It's something that we think, over time, better approximates best price, and they don't need to have an account or have a relationship with the source of liquidity; we act as an agent between ourselves and the client, and then between ourselves and the liquidity provider.

Tom Jessop
It's a pretty seamless experience and a paradigm that is familiar to family offices and other institutions who are familiar with how other assets trade.

David Nage
Let's talk a little bit, let's dig a little bit deeper in there, and this shouldn't be a surprise, but we obviously saw some research from Bitwise, which I've cited many times on the show before, and we saw that some of the exchanges, there's give or take a 100 plus exchanges out there right now. In their attempt to obviously try to get SEC approval, they did a lot of analysis on those exchanges for spoofs and for other things that were probably not legitimate. They came across about 10 or so different exchanges which they deemed, I guess you can call it like the BIT10, or people are calling it the BITO exchanges.

David Nage
Can you talk to us from a counterparty perspective, obviously with this multi-venue trade execution, if you get a sense of the exchanges and the professionalism and the institutional quality of those exchanges? Come from a background at Goldman for a long time, what do you see out there right now in terms of the quality of exchanges that you can potentially work with?

Tom Jessop
I think it's evolving. We've taken the path of working with OTC liquidity providers initially because we felt the quality of the liquidity, or at least the size of the liquidity, was perhaps more compatible with the types of clients we're going after. We put all of those liquidity providers through a fairly extensive onboarding and credit risk management process, which is one that we've perfected in other parts of fidelity. We obviously, to your point, spend a lot of time diligencing who we will work with.

Tom Jessop
Quite frankly, I think you're starting to see positive evolution in the exchange space with the entrance of someone like ErisX, and eventually backed. But my take, coming from institutional finance, is that many of these exchanges were, the older crypto exchanges, institutional in name only. Most institutional investors would look at these exchanges, how they operate, the quality of the liquidity and so on and so forth, and probably not apply the institutional moniker to them. I think that's changing quite dramatically.

Tom Jessop
But as part of our process, we are taking on a fair bit of diligence and work to make sure that the standards of these liquidity providers, and potentially exchanges, meet minimum Fidelity standards, which are a reflection of minimum institutional standards.

David Nage
I think that's really an important point, the amount of diligence that you guys are doing. It's, again, to go over that data point, which may be old, but over $7 trillion in assets under administration. You guys are responsible to regulators, you have oversight, you can't just willy-nilly this and say, "Oh, we're going into digital assets and we're going into crypto." You have to go through an excruciating amount of performance, and diligence, and underwriting on every operation.

David Nage
It might not be the fastest to market, but obviously, you guys are pretty much the fastest just because you had such a lead time and the amount of work you guys did. But other institutions out there have been very slow, and I think it's just important for people to listen. It's like you can't move a mountain at 50 miles an hour or 60 miles an hour; you have to let it go, and it will go, eventually, but there's an amazing amount of work that needs to be done to get there. I definitely credit you guys for doing it the right way.

David Nage
In terms of the product also, initially, you guys were going with the bitcoin, if I'm obviously ... I know you guys are going with bitcoin. If you could, maybe talk to us a little bit about why bitcoin first, and not bitcoin and Ethereum, or maybe some of the other coins. Why bitcoin first? And then, in terms of the roadmap, what's a roadmap for the next six to 12 months in terms of adding new crypto assets, or some of the new innovation that you guys might bring to the table?

Tom Jessop
Yeah. I think bitcoin simply because that's where the demand is. It's obviously the largest asset by market cap.

Tom Jessop
I think if you actually segment the client base, I think for purposes of this discussion, it may be oversimplifying, I think there's a pool of dedicated asset or crypto funds; they only invest in digital assets, their interests are spread across a wide range of coins or products. And then I think you have more traditional investors, which I think is really where we're probably more focused right now, for whom bitcoin is their first entrée into the space. They've done work from an asset allocation standpoint to understand the role of something like bitcoin in a diversified portfolio, or they've developed some native thesis, or an absolute return tied to network metrics or other things.

Tom Jessop
So right now, a lot of our focus is on how do we serve the needs of those people that are starting to allocate and will allocate to bitcoin? Whereas over time, we think they probably begin to expand their horizons thinking about other assets.

Tom Jessop
Our general view is that we will continue to add assets to the platform. I think we will largely do that as a function of customer demand, and I think customer demand, again, moving off of bitcoin, I think will probably track market cap as you move to the other assets. I think we have another three or four assets that have been approved through our Business Approval Committee, which we will implement at some point, but right now, we're very focused on bitcoin because we think that's where the demand is.

David Nage
In terms of risk, and it's interesting, I've been rereading Howard Marks again, so risk has different flavors, but majoritively speaking, an investor does not necessarily want to eat someone's lunch, especially a manager or someone else, if there's volatility. "Oh, there's a 10% drawdown, blah, blah, blah." An investor will eat someone's lunch if there's a complete capital loss. That is a major risk.

David Nage
In understanding your kind of perception of risk in terms of the other crypto assets, is it majoritively the liquidity risk? Without giving away, obviously, the secret sauce, but is liquidity risk one of the major things you guys are looking at in terms of new assets coming to market?

Tom Jessop
It's certainly something that we look at. Obviously, if we are presenting a service to institutions who, again, expect a certain amount of liquidity in other things, for coins that are more thinly traded where the exchange infrastructure or the LP infrastructure is not as well-developed, there is a question about can it support institutional size trading? I think that's one part of it.

Tom Jessop
But again, I just go back to this idea that we're led by our customers. There's a reasonably, if you look at the entirety of institutions interested in the space, there's a reasonably small but growing cohort that are interested in many types of digital assets. They're the native crypto funds. There's a much, much larger number of institutions who are starting to think about the space, and when they want to allocate, their first thinking about bitcoin. What we're trying to do is manage the balance between the two in a way that's very client-led.

Tom Jessop
My expectation is that for many of the folks on the more traditional side that have been doing their work on bitcoin, already own bitcoin, they're probably looking at things like Eth and other assets, and we'll follow that trend over time and apply the same lens that we did for bitcoin in terms of what are minimum institutional standards, how do we support this, before putting them on the platform.

David Nage
Got it. That leads us to a really good segue in terms of a recent report you guys did. You did a survey of 411 US institutional investors, among which 40% of respondents said they are going to open or they are open to future investments in digital assets in the next five years. Furthermore, almost half, 47% of the respondents, said that they see a place in digital assets in their investment portfolios.

David Nage
Now, I know obviously, as a fiduciary and someone that there's client confidentiality and we're not asking for names, but to get a sense of the type of investor, there's been this narrative for this last two years, "The institutions are coming, the institutions are coming," almost like Paul Revere, so that has kind of stalled a little bit and we can obviously opine about the reasons for that, and one of them is because we didn't have someone like a Fidelity in the market at that point in time, but without naming names, but potentially giving us a sense of the investor type, whether it's family offices, pensions, endowments, could you give us a little more color on the respondents and demographic basis? And also, why do you think it's now? What about it now? Is it because of the price increase in bitcoin over the last six to seven months? Is there other markers that you guys are hearing from them that is signaling to them? Why now?

Tom Jessop
Yeah. So maybe answer the last question first. I don't think it's as a result of the price activity. We have been talking to clients and prospecting through a good part of the crypto winter, and we never saw a diminution of interest.

Tom Jessop
I think it's the case with institutions, many of whom themselves are fiduciaries for others, they have to do their homework. They have to understand the space. They have to develop a thesis and I think it's taken them a while–and that's not meant to be a black mark, it's just the right thing to do–to come around to the idea of what is this thing? Why should I be interested in or not? And what role does it have in my investment approach?

Tom Jessop
I think what you've seen is just given this, increasingly in the public consciousness over the past couple of years, let's call it the early adopters amongst those institutions getting to the point where they've done their homework, and they're interested in allocating. Then the next question is okay, this is great, but can I actually access the market? That raises secondary questions about liquidity, about custody etc. We think it's a very normal and healthy evolution to this point.

Tom Jessop
We did speak to a wide range of institutions, starting with family offices and RIAs on one end, to hedge funds, 40 Act, pension, endowment, and a couple of cross-sectional observations: I would say that if you put those investors on a risk-taking spectrum putting hedge funds and perhaps family offices at the higher propensity to take risk or think about risk versus others, that's where you probably saw the most current interest, which makes sense. Having said that, in our client discussions, we're starting to see more interest from the more traditional investors and folks that perhaps wouldn't have that same risk tolerance on a relative basis now getting interested.

Tom Jessop
I think the other thing that we've seen is that a very high correlation in the results between folks that said that they were educated or very educated or knowledgeable about the space, and their propensity to either purchase intent or current ownership. We still think there's a lot of education that we need to do as an organization and as an industry or ecosystem in terms of providing the types of input and information that allow folks to become more conversant, which only then would engender, perhaps, some decision to buy.

Tom Jessop
I thought most interestingly in the results, we asked people what are the reasons why you're not investing or why you may have reservations about the space? I think they mentioned volatility. I'll talk about these in order and then come back to them. Volatility was a big issue, lack of a track record was another issue, and then regulation was a third issue. Those were the top three reasons why folks who hadn't invested were perhaps reluctant to. I think some of these things sort themselves out.

Tom Jessop
I think with, as we discussed earlier, more institutional infrastructure coming into the space, whether it's Fidelity, or some of the exchanges, or others coming in, the fact that people can express differential views on the market with increasing amounts of liquidity available will mean that, over time, I think volatility will dampen. You've seen obviously a big run-up in futures activity. All very healthy and I think, over time, should solve that problem.

Tom Jessop
Lack of a track record, we're 10 years in on bitcoin. I think the way I interpret lack of a track record is really less about, "Will this thing be around in two years?", although there may still be a little bit of that; I think it's more, "Is there enough data, whether it's price data, network data, that I can actually look at the information and develop enough of a thesis to say, 'Okay, I think this is the right time to invest'?"

Tom Jessop
And then regulations always going to be an issue. We were very encouraged by, I guess, the request for comment from the SEC asking, in broad-brush terms, about the application of this technology to finance, how it could be an enabler. We think that's very healthy given that a lot of the initial engagement was around the ICO bubble, and enforcement actions, and unregistered securities offerings etc. We think that, from a regulatory standpoint, things are moving in a positive direction.

Tom Jessop
So again, I think a lot of these concerns that people have, I think over time, probably sort themselves out.

David Nage
Let's dig into there a little bit because you just brought up regulatory and we were going to talk about Libra because everyone's talking about Libra, which is such a genius thing, by the way. They've been able to get the entire ecosystem talking about them for the last two weeks. I was on TV this morning talking about Libra. It's getting a little too much, but kudos to those guys, to David Marcus and the team over there.

David Nage
But you saw Maxine Waters and you saw some members of Congress want to bring in David Marcus and the team over there from Facebook and Libra to talk to them a little bit more. You saw France and you saw some of the French regulators say, "Not here," although you also saw England, I think it was Carney, who said, "This is actually kind of interesting."

David Nage
In terms of the regulatory landscape, it seems that Libra is kind of taking it on the chin. I'm curious, with, I think it was FATF that recently just came out with some oversight too, you mentioned that you're seeing, obviously, better things on the regulatory standpoint, but where does this go? Do we continue to see more regulation? Is more regulation good? Are we going to finally get to a point where we get a sense ... Obviously, Hinman kind of opined about Ethereum a while back. Do we finally get some clarity on that from what you're hearing on your side of the aisle? Are we going to get some clarity soon from the CFTC and from the SEC about how these are all classified?

Tom Jessop
Yeah. I tend to view all of this in a more abstract way, which is, coming back to the education point, I think that perhaps Libra was a catalyst for legislators and perhaps some regulators that the technology's real. In the hands of a company like Facebook and its partners, the association's not owned by Facebook as I understand it, but they have more of an open source project, the ability to provide financial services to a large number, billions of people, at scale is really representative of the fact that the technology is an enabler and can have significant effects on society and financial markets over time.

Tom Jessop
I think, if anything, it's probably a catalyst for more of this dialogue between regulators and the industry to occur. Look, I think regulations is a good thing if we want this asset class to scale, if we want to realize the full benefit of the technology. Like any other technology that powers financial services, it has to be done within a regulatorily compliant wrapper. Full stop.

Tom Jessop
I know there are aspects of the ecosystem that probably think differently, but if this is the catalytic event that forces the type of discussion and perhaps an acceleration around the role of government and regulation in the space, I think it's probably a constructive dialogue to have, with the caveats that these things take a long time, there can be a lot of uncertainty, but certainly feels like we've arrived at a moment where this will be a point of focus for the next couple of years.

David Nage
So this is going to be a little bit of a funny question, but with your background, and again, nothing on Base Layer is investment advice, so I'm not asking for investment advice, but with your background, coming from traditional finance, and with your understanding of things like probabilities, and with sensitivity analysis, and scenario analysis, I've heard from the family office world, coming from that world, there are some that are naysayers that say, "Bitcoin's a scam," they believe in the Buffet narrative of having no intrinsic value, and they say it's going to go to zero.

David Nage
Now, again, I'm not asking for price predictions, we don't believe in that at Arca, and anyone who's trying to do that, I think it's proven out to not necessarily be a fruitful endeavor, but do you see in a world, with the kind of demand that you're starting to see right now, do you see bitcoin having any probabilities right now? Obviously, there is some probability. There's always probability. But do you see a lower probability or a higher probability of that actually being true?

Tom Jessop
I agree with you that–I don't make predictions either–there is a greater than zero probability, I guess, that it could go to zero, and I guess we could debate that with others for hours in terms of what potentially could cause that, but I think the more activity on the network, the more venture funding coming into the space, defined use cases and other types of utility around the bitcoin blockchain or other distributed ledgers, I think over time, decreases the probability of an event like that.

Tom Jessop
But having said that, the people we talk to have very different ways to think about this. Some people are thinking at in terms of asset allocation, others are thinking about it more from a venture standpoint, somewhat idiosyncratic risk. What I would say, having been an investor in a lot of fintech companies, you invest in a seed stage company, there's some probability that it goes to zero. You're never fully out of the woods from a risk standpoint, and every investor's going to have to make their own determination about what risks they're comfortable with or not.

Tom Jessop
But again, I do think ten years on, people would probably say there have been some near-death experiences for the bitcoin blockchain, but in its own way, continues to gain and strengthen momentum. I think those are generally net positive in terms of risk reduction over time.

David Nage
I agree. Getting to the top of the hour, this has been a great conversation with Tom, but as anyone who listens to the show knows that we like to spend a little time getting to know our guests from more of a personal standpoint. As I've said time and time again, we typically put two inputs into our brain every day: what we read, and what we listen to. I find music is a really good telling property of someone's personality. We've had people that have come on that surprised me and said that they listen to metal, and some that listen to classical music, and some that listen to their native Polish music. People have obviously been very well-read in crypto and outside of crypto, so reading about the history of money, and reading about computer science and cryptography.

David Nage
So I would love to hear from you what you've read recently that really resonated, either crypto or non-crypto-related, and also, what kind of music you listen to?

Tom Jessop
Sure. I just read Bitcoin Billionaires, of course. Great weekend read, beach read. Ben Mezrich is a great author. I've read a number of his books. I highly recommend that, but that's pretty obvious.

Tom Jessop
A book I'm reading now, which I'm really enjoying, is called Range by David Epstein. I think this is probably the mirror image to the book that Malcolm Gladwell wrote about how 10,000 hours of specialization makes you an expert in something. What David basically posits is that in an increasingly diverse world, being a really strong generalist, in some ways, is more important than being a specialist and cites examples about where that's been the case. It's kind of fascinating read, if that's your thing, and that's certainly a personal philosophy that I've always subscribed to, so it's nice to see a little bit of validation reading that book.

Tom Jessop
And then from a music standpoint, I'm actually going to plug my son's band, The New Pollution. He's in college, he's pretty prolific. It's like a mashup of LCD Soundsystem, David Bowie, and Beck. I think he's on Bandcamp and SoundCloud, whatever, but done in our garage, so take that with a grain of salt. But actually, I'm a big fan of Americana music. It's like country music that isn't top 40 and overproduced, and there's an interesting artist called Ian Noe, who I think is from North Carolina, and he's got an album called Between the Country, and it's quite good for folks that are into that genre or willing to try something new.

David Nage
Wow. I love it. And everyone, checkout Tom's son's band because that sounds ... I'm a big Bowie guy, so if he's got some of that, I would definitely check that out.

David Nage
Lastly, the other thing that we like to do with our guests on the show, where can people find out more about Fidelity Digital Assets? How can they reach out to you and your team? Give them a little bit of insight there and that will be about it.

Tom Jessop
Yep. You can find us at FidelityDigitalAssets.com. We also have a great Twitter handle @DigitalAssets. That's how you can find us.

David Nage
Amazing. Again, this was Tom Jessop, the Head of Fidelity Digital Assets. This was a great conversation with a team that have built a product that was so sorely needed in this industry and the space, and we were really all very happy when this came about.

David Nage
Tom, thank you for the work you've been doing there, and thank you to your team that have been working hard to get this system and platform up to the market, and we'll be hopefully catching up with you in a few months. Thanks, Tom.

Tom Jessop
Thanks, David.

David Nage
For more notes from this past episode about our guest, please go to www.AR.ca/baselayer. Nothing stated on this podcast should be taken as investment advice, which would require a thorough assessment of each investor's personal financial profile and risk tolerance. Statements regarding past performance are not necessarily indicative of future returns.

David Nage
If you like what you're listening to on Base Layer, let us know. Subscribe, give us a like, or hit us up on Twitter: Arca, @Arca; or myself, David Nage, @DavidJN79. Let us know and we'd love to obviously hear from you.

David Nage
For additional resources to help sophisticated listeners like yourself learn about the digital asset space in the financial terms you understand, please visit www.AR.ca for articles, market commentary, videos, and more.