We are looking at the entry of large financial institutions into crypto.
For the past couple years, digital asset platforms were built out. What was created serves as an appetizer for what is underway.
As the interest in stablecoins grows, crypto's "killer app" is becoming commonplace. It is already a $310 billion market, one that is going to explode over the next couple years.
The growth since the passage of the GENIUS Act in the United States is impressive. Last Summer, when it was voted upon, the total market cap was roughly $250 billion. That is more than a 20% growth rate in about 6 months.
"You ain't seen nothing yet".
All of this is happening without the major players. That is about to change.
Large Financial Institutions Are Coming: Fidelity
Fidelity is one of the largest financial institutions in the United States. It has roughly $5.5 trillion in assets under management. That would place it third behind Blackrock and Vanguard.
The actions of Blackrock regarding crypto are well known. This was one of the leading traditional Wall Street firms with regards to crypto. Its Bitcoin and Ethereum ETFs are the largest in terms of market cap. We also saw them release an institution only stablecoin.
Fidelity is now getting into the action by issuing its own stablecoin. This is going to be released on Ethereum, furthering the theory of Tom Lee who believes Wall Street firms will all gravitate towards that network.
Fidelity Investments is launching its first stablecoin, the Fidelity Digital Dollar (FIDD), in early February, marking a major move by one of the largest traditional financial institutions into onchain finance.
FIDD will be issued by Fidelity Digital Assets, a federally chartered national bank and subsidiary of Fidelity. The Ethereum-based stablecoin will be redeemable for $1 on Fidelity’s crypto trading platforms — Fidelity Digital Assets, Fidelity Crypto, and Fidelity Crypto for Wealth Managers — and will also be made available on major crypto exchanges, according to a press release.
These are not specifically demand deposit which a bank such as Chase or Bank of America have. It is, however, a large asset base which can be integrated into crypto payments.
Over time, as more digital products roll out, we are going to see stablecoin usage increase.
A key point is the token will be available on major crypto exchanges. This is not surprising since it is a way for these institutions to expand their reach.
Network Effects
Whatever level we focus upon, this all comes down to network effects.
For an individual firm such as Fidelity, the goal is to get as much activity related to the token as possible. The digital world is based upon the premise of network effects. Tether holds a commanding lead, being the dominant player in the stablecoin space.
This will be challenged as larger firms join the fray.
By providing access to the token to non-Fidelity users, the investment bank seeks to grow the utility. Of course, if accepted, it can be used for payments, no different than any other token.
One of the largest use cases is as a vehicle currency. This is moving from one asset to another. The idea is to transfer the value across a system before converting it to the end currency.
The US dollar typically serves in this role.
For example, a business in Germany might have operations in Japan. The yen it has needs to be converted to euro. We might be the yen swapped into USD before being shifted into euros. The reason for this is transaction costs and slippage. Based upon the liquidity, we see the USD having the lowest fees.
People are finding that swapping from a BTC to a stablecoin, them moving it to an exchange, before converting to USD (or some other fiat currency) is less costly than moving the BTC and incurring CEX fees.
FIDD could provide a solution for both retail customers and institutions.
FIDD is designed for use cases such as 24/7 settlement for institutional traders and on-chain payments for retail users. It can also be transferred to any Ethereum mainnet address, enabling broader use across decentralized finance (DeFi) protocols and blockchain-based platforms.
Again, this is one of the largest financial institutions in the world.
My guess is this is not going to take business away from Tether. There could be a bit of a change but much of Fidelity's volume will be additional business. It is now opening this up to all of its customers.
Then we have the commercial banks. They are lurking around the corner. When they bring out their own stablecoins, then Tether might be facing a serious issue.