* To act as custodian for Nickel Digital Asset Management

* Deal is its first tie-up with a European firm

* Barriers to institutional investment weakening -Fidelity

By Tom Wilson and Simon Jessop

LONDON, Jan 14 (Reuters) - The cryptocurrency arm ofFidelity Investments, one of the world's largest investmentmanagers, has launched its first foray into Europe, opening anew front in efforts to drag digital money into mainstreaminvesting.

Fidelity Digital Assets will act as a custodian for bitcoinheld by London-based cryptocurrency investment firm NickelDigital Asset Management, the two companies said on Tuesday.

The lack of back-office services like custody offered bymajor financial firms has been one reason that large investorsacross the world have held back from involvement in the highlyvolatile but potentially lucrative emerging asset.

Yet it remains to be whether the provision of such servicesalone by firms like Boston-based Fidelity, which has $7.8trillion under management, will pave the way for an influx ofmainstream money into cryptocurrencies.

Big pension funds and asset managers remain highly scepticalof digital currencies because of their patchy regulation andreputation for hacks, heists and other crime, despite the largepotential gains on offer.

Bitcoin BTC=BTSP almost doubled in value last year, buoyedby expectations of growing mainstream use. Yet bitcoin marketsare dysfunctional and plagued by double-digit price swings,opaque price discovery and patchy liquidity.

Facebook's FB.O high-profile attempt to drawcryptocurrencies into the mainstream with its Libra coin has metwith regulatory scepticism globally, with France and Germanypledging to block the currency from operating in Europe. urn:newsml:reuters.com:*:nL5N2640WJ

Fidelity Digital Assets' Europe head, Chris Tyrer, said thehurdles to participation in cryptocurrency markets byinstitutional investors - regulation, as well as the quality ofservice providers and high volatility - were gradually becominglower.

"We see those three factors slowly resolving themselves, andas a result we are seeing a pick up in institutional investorinterest," he told Reuters. Harmonised regulation in theEuropean Union would be useful for service providers, he added.

Tyrer said his firm was attracting interest from familyoffices, wealth managers and some cryptocurrency companies. Hedeclined to say how much money it manages or how many clients ithad.

Launched in 2018, Fidelity Digital Assets offerscryptocurrency trading and custody services for financial firmsand corporations. In November it was given the nod by New York'sfinancial watchdog to offer its services to companies in thestate. urn:newsml:reuters.com:*:nL2N1WV0Y2 urn:newsml:reuters.com:*:nL2N27Z0PC

(Reporting by Tom Wilson and Simon Jessop; Editing by PravinChar) ((T.Wilson@thomsonreuters.com; 44-20-7542-4531; ReutersMessaging: t.wilson.thomsonreuters.com@reuters.net))