The Opposite of Fidelity is Cryptocurrency
By Bartlett Naylor, financial policy advocate for Public Citizen
Now that cryptocurrency values are collapsing, with industry titans such as Sam Bankman-Fried exposed as frauds and con men, we must hold to account those who helped lead unwitting, vulnerable people into this $3 trillion miasma.
Bankman-Fried and other hucksters will face investigation and possible prosecution. Celebrity promoters such as Tom Brady and Matt Damon also deserve a dose of infamy for their role in crypto’s rise. But even Bankman-Fried wasn’t offering crypto as a long-term investment for retirees. And celebrities didn’t claim expertise in crypto — just sports or movies.
Near the apex of institutions that must be held responsible for promoting this crypto pyramid is Fidelity, the giant Boston-based mutual fund company.
Too many mainstream brokerage firms whose business relies on trust (investments, after all, are held in “trust” departments) exploited customers caught in the headlights of a zooming Bitcoin price and offered brokering services or other ways to buy into these digital assets. This includes Wells Fargo, Morgan Stanley, Schwab, Goldman Sachs, and many others.
But Fidelity (a moniker meaning faithful, loyal, trustworthy) — with some 32 million customers — stands apart in its enthusiastic embrace of crypto, despite being known nationally as a giant of responsible retirement investing.
This brand image was best exemplified by the tenure of Peter Lynch, the famous Fidelity Magellan mutual fund manager. Lynch understood his responsibility to promote sensible investments and was well aware of the danger of investment manias.
Asked about the biggest mistake made by individual investors, Lynch once said: “The public’s careful when they buy a house, when they buy a refrigerator, when they buy a car. They’ll work hours to save a hundred dollars on a roundtrip air ticket. Yet they’ll put $5,000 or $10,000 on some zany idea they heard on the bus. That’s gambling. That’s not investing. That’s not research. That’s just total speculation.”
Under Abigail Johnson, granddaughter of Fidelity founder Edward C. Johnson and daughter of longtime chairman Ned Johnson, who died last year, Fidelity went crypto crazy.
The company began in 2014 with a Fidelity Digital Assets project. This involved “mining,” which is the misleading term for validating transactions with digital coins such as Bitcoin. Essentially “miners” engage in computer guessing contests with each other, with the fastest winning the reward, namely a bit of the digital currency itself.
But mining makes the Ponzi scheme of crypto worse than ultimately worthless because of the enormous energy consumption — all wasted. Crypto mining uses more energy than many smaller nations, exacerbating global warming.
As the 25% owner of Fidelity, arguably, it’s her energy to waste.
But recently, instead of focusing on trustworthy investments, her firm has enabled workers to invest in crypto through their 401(k) plans, the type of plans that have become a central vehicle for worker savings. Long gone are retirement funds that promised a set benefit upon retirement.
Those company plans of old employed investment experts who were certainly more qualified to decide how to invest than the average worker. But that’s been replaced by plans where the company contributes to funds managed by the employees themselves, supplemented by employee contributions.
The U.S. Department of Labor polices this critical market and declares that plan sponsors must adhere to standards of prudence that are the “highest known to law.”
Cryptocurrencies don’t meet such a prudence standard. Consider the obvious: even though cryptocurrencies have been around since 2009, and there are now thousands, none are used as currencies.
Useful technology innovations explode in a matter of years, even months. Examples include personal computers, the internet, and smartphones. But in more than 12 years, the only use of a cryptocurrency has been for pyramid schemes.
Fifteen hundred technology experts emphasized this in a letter to Washington lawmakers warning against legislation and rules that legitimize and enable these schemes.
Fidelity’s decision to offer cryptocurrencies in retirement plans, announced last April, raised serious concerns at the Department of Labor, which is now working to combat this dangerous use of 401(k) funds with warning disclosures.
Fidelity manages money for some 22,000 employers that sponsor 401(k) plans. Especially pernicious, Fidelity won’t be held liable for any violation of this “highest” prudence standard.
The only party held accountable will be the employer if it uses Fidelity and allows cryptocurrency into the mix of available options. But Fidelity with Johnson at its helm mustn’t be excused for moral responsibility.
Fidelity should stop offering crypto in the 401(k) plans it manages. U.S. Senators including Elizabeth Warren (D-Mass.), Richard Durbin (D-Ill.), and Tina Smith (D-Minn.) agree and have called on the firm to end this dangerous path.
Fidelity: it’s time you lived up to your name.