Blockchain and Crypto
How Fidelity is experimenting with bitcoin
- Interest in public blockchain networks has rebounded and banks are still largely uninterested -- but Fidelity is still long on bitcoin.
- Financial services keep setting expectations for how blockchain technology will transform the industry in the future, but they're basing them on what they only know as of today
Fidelity Investments may be one of the few incumbents that are bullish on bitcoin. It sees "a future where bitcoin and blockchain thrive," according to CEO Abigail Johnson, speaking Tuesday at the Consensus conference in New York. “We still think this scenario has a reasonable chance of coming to pass -- despite what the skeptics say.” This week, the price of bitcoin shot past $2,000 for the first time and is currently trading at about $2,200. Ethereum increased 1400 percent in the last three months and is now trading at about $180 -- which community observers and conference attendees say has much to do with new interest in ICOs. But despite the growing interest digital currencies and public blockchain networks, few if any financial institutions haven't come out and said they're interested in working with them, instead focusing on the technology that powers them: blockchains, distributed ledgers, smart contracts -- for their industry or organizations’ own needs. In the original bitcoin blockchain, transactions are recorded on a public ledger anyone can see, although users are pseudonymous, identifiable only by alphanumeric addresses. That doesn't mesh well with the need for privacy in high-stakes transactions between massive companies, which is why banks have sought “permissioned” blockchain-like solutions that allow for more privacy in terms of how data is stored and who can access it. Judging the future by the present is not a productive approach, Johnson said. “If you only look at this technology through the lens of the problems that exist today you won’t find a lot of compelling use cases, at least not that can be implemented at scale,” she said. “If you’re looking for bitcoin to beat Visa at the point of sale today you'll be disappointed. If you're looking at this technology as just a faster settlement system for financial transactions you'll also be disappointed. But I’m still a believer.” Johnson’s remarks aptly represented the mood at this year’s conference, the third for Consensus, and industry-wide. While the energy of the inaugural event came largely from crypto-enthusiasts, last year’s was filled with bankers in suits, on and off the main stage. Attendees tripled from the first year to 1,500 in the next; about 2,500 came out this week, with balance interest in private blockchain networks for highly regulated industries and a rebound in interest in public blockchain networks. Fidelity has built proofs of concept for bitcoin micro transactions, set up a small bitcoin and ethereum mining operation “in the spirit of learning, but miraculously we’re actually making a lot of money,” she said. It enabled bitcoin payments in the Fidelity cafeteria -- and had fewer than 100 employees purchase bitcoin. It has also partnered with bitcoin wallet Coinbase to allow clients to contribute bitcoin to there donor advised funds accounts with Fidelity Charitable; it has facilitated more than $8 million in bitcoin contributions through that platform. Fidelity also gave its employees the ability to view their Coinbase holdings on Fidelity.com and will be rolling out the same functionality to its customers “soon,” Johnson announced. It was through the hands-on experimentation -- testing the Coinbase user experience, making purchases with bitcoin and even trying to make returns -- that the future-present dilemma became clear. A lot of the work with blockchain technology, in financial services or otherwise, is about the future. But in the learning process, people naturally try to compare their experiences with the present. “When people are exposed to new concepts they need to make sense of something they don't already have a mental model for,” Johnson said. “Our research teams noticed what was happening when people encountered their recovery phrase,” a random string of words to be written somewhere and stored somewhere that acts as a backup of a user’s funds, “for the first time. They tend to struggle because they don't have a mental model for this kind of thing.” Fidelity found three types of reactions: one in which people reacted by trying to compare the situation with something they’re previously familiar with -- for example, treating the recovery phrase like a password and expecting there would be a Forgot My Password button they could press -- one in which a fair few were able to develop a new mental model and one in which the users quit and never adopted the technology. Usability is a challenge, Johnson concluded. “In the same way users we studied defaulted to known mental models, all the regulators will go through the same kind of process and it will cause some growing pains,” she said. “Too often we see bitcoin and blockchain technologies as solutions in search of a problem. We need them to be more user friendly -- not just technically better.”