If the crypto sector is to attract more institutional investors, it will need to provide more insurance solutions. This point was driven home anew with the recent news that the Gemini crypto exchange has launched a captive insurance company, Nakamoto Ltd., to insure its Gemini Custody business for up to $200 million — reportedly the largest amount for any crypto custody service in the world.
This new insurer will help Gemini’s institutional clients to meet their regulatory requirements, Gemini’s head of risk, Yusuf Hussain, this “is consistent with Gemini’s approach of being a security-first, compliance-first, and regulatory friendly exchange and custodian.”
Black swan events
The crypto sector badly needs risk transfer solutions, including traditional insurance, and this goes beyond protection from hackers and thieves. It is no secret that the crypto world suffers from continued price volatility and that users could benefit from some protection against market gyrations — whether through traditional insurance carriers or by other means.
Equilibrium, a multichain framework for DeFi products, explained in a white paper: “The crypto community needs a reliable insurance mechanism to ensure users of DeFi projects will get their funds back in case of a black swan event.”
A black swan event needn’t be catastrophic. It could be South Korea deciding to shut down all its cryptocurrency exchanges, for instance, or United States regulators suddenly lowering the hammer on Bitcoin (BTC).
Along these lines, Equilibrium has recently created a “stability fund” to protect the users of its stablecoin, EOSDT, against “extraordinary market events,” which is self-capitalized with 6.5 million EOS tokens, worth about $17.5 million at the time of the fund’s announcement in mid-December.
As Equilibrium CEO Alex Melikhov stated users expect that the price of EOSDT remains stable, saying: “But in an extraordinary market event, the price of all cryptos, including EOS, could plummet.” ESODT users could suddenly find their positions liquidated and liable for a 20% penalty fee due to insufficient collateral. According to Melikhov:
“Should something unusual happen, like a market shock to cause the value of EOS to plummet and the overall system collateral value to drop below the total dollar value of EOSDT supply, our smart contract-based fund can step in and algorithmically ensure that EOSDT users are able to maintain their value.”
Equilibrium isn’t the only crypto firm to implement a self-capitalized fund for the protection of its users. In July 2018, leading crypto exchange Binance announced that it would allocate 10% of all trading fees it received into a Safe Asset Fund for Users (SAFU), which are stored in a separate cold wallet, to protect users and their funds in “extreme cases.”
An extreme case occurred 10 months later, in May 2019, when hackers stole 7,000 Bitcoins — worth about $41 million at the time. Binance used its SAFU as a kind of emergency insurance to cover the incident.
Proceed with caution
Meanwhile, traditional insurance companies are beginning to dip their toes into the crypto waters. “Over the last two years, insurance carriers have cautiously expanded underwriting appetites to provide coverage for crypto exposures,” according to broker Willis Towers Watson. “But so-called crypto coverage isn’t cheap, and underwriting remains hamstrung by the unsettled and even precarious state of cryptocurrencies as well as the lack of historical loss data.” The broker’s message comes down to: proceed with caution.
More crypto exchanges and custodians are turning to traditional insurers and brokers to secure protection against hackers and thieves. In April, Coinbase revealed details of its $255 million limit insurance coverage for its hot wallet crypto holdings — purchased through a Lloyd’s of London-registered broker. Gemini, for its part, was assisted by major brokers Aon and Marsh in its recent Nakamoto Ltd. launch.
In the wake of last year’s Quadriga scandal, crypto security firm Bitgo announced a $100-million Lloyd’s underwritten policy to cover the digital assets of its custodial clients “where the offline private keys are held 100% by BitGo, Inc.,” per a press release.
“Some insurance companies are further along than others” when it comes to working with the crypto community, Jacob Decker, vice president and director of financial institutions with insurance broker Woodruff Sawyer stated.
He went on to add that most still have to educate their management teams about cryptocurrencies and that it’s not an overnight process. It can take two to three years. That said, more carriers are beginning to write policies today, said Decker, who helped BitGo secure its Lloyd’s policy.
Best use of capital?
Often, exchanges have elected to self-insure by setting aside capital to cover potential losses. There are problems with this approach, however. Setting aside coins that could have been potentially invested is often not the best use of capital, said Lei Wang, head of Huobi’s Global Institutional Center, and risk remains fairly concentrated within the exchange — without access to the reinsurance market. Coverage terms and claiming procedures are often ambiguous, too, due to lack of expertise. Wang stated
“We have currently put aside 20,000 Bitcoin, which could have been put to better use in the ‘Huobi security reserve’ as a fallback protection mechanism in the event of security breach. The funding cost is significant.”
Huobi is interested in exploring other insurance options, Wang explained, including forming a captive insurance entity, in which segregated funds are held in regulated and audited vehicles that could potentially help the exchange get more coverage from the reinsurance market. Wang added that he is “optimistic about the captive insurance option.” Details like standardisation and pricing would still have to be figured out, and even here he had a few caveats:
“Every exchange has different security mechanisms and potential exposure to attacks. It would be difficult to come up with a standard industry pricing model without completely understanding each exchange’s security methods, assuming they are willing to share with competitors. Furthermore, owning insurance may encourage exchanges to reduce investment in security to compensate for the cost of the insurance.”
Insurance has its limits
Not everything can be easily insured, however. Crypto assets held in hot wallets are difficult — and expensive — to insure, and “We can’t insure against Bitcoin going to zero,” added Decker. For a user who is worried about losing their private key, “the best thing may be to go to a speciality vendor who will protect you, a firm that will make you whole.” The retail investor will want to research the reputation of that vendor and its balance sheet before entrusting crypto assets to them.
Insurers need a framework by which to assess and price risk, according to Decker, something the crypto community doesn’t always understand. Who, in the case of exchanges, is the insured’s regulator? Does the firm have a relationship with that regulator? What’s the financial condition of the company? Are there minimal capital buffers? Audited financials? Who is on the management team? Are they experienced? And so on. Decker summarised:
“The evolution of companies dealing in crypto has been extremely rapid. A crypto exchange trading today looks very different from one trading several years ago.”
According to Decker, they often have audited financials, a chief compliance officer, and seek out regulators when issues arise. When regulatory compliance is a priority, businesses are easier to underwrite. Overall, “I feel very positive,” Decker said.
NBA & NFL See a Future In Non-Fungible Tokens, But Not Contract Tokenization
NFT NYC, is a crypto event taking place a couple of hundred feet from Times Square dedicated to non-fungible tokens. While most of the companies at NFT NYC are early-stage startups still looking for their users, two attending organizations have hundreds of millions of fans around the world. Adrienne O’Keeffe, associate vice president of partnerships at the NBA, and Sophie Gage, counsel at the NFL Player’s Association, joined a panel to discuss the value of blockchain technology for big brands.
“This is a new way for fans to connect with our games”, says O’Keeffe. But Gage, who is a lawyer, notices “there is a lot of uncertainty: are these utilities, are these securities?” Panini, who is a giant in the traditional players’ cards market, has issued blockchain-based cards for NFL, MLB, NBA as well as for various soccer teams. “It’s a new area for growth. There is a lot of untapped potential”, observes Gage.
The NBA has experimented with both public and private blockchains, each with its own pros and cons. Public blockchains allow more freedom and greater engagement at the expense of control. Private blockchains give you greater control, but you trade freedom and engagement for it. O’Keeffe also shared her advice to blockchain entrepreneurs looking to sell their products to the NBA:
“We have met with dozens of companies in the space. They were coming to us with capabilities, not products.”
Many NBA and NFL players are into crypto. Perhaps the boldest venture in the area was Nets player Spencer Dinwiddie trying to tokenize his NBA contract. The NBA eventually shut it down — Gage and O’Keeffe both believe we won’t see contract tokenization anytime soon.
Dubai Government Set To Launch KYC Blockchain Consortium In Early 2020
One of the financial hubs of the Middle East, the United Arab Emirates (UAE), is continuing to expand blockchain-driven developments. The Department of Economic Development (DED) of Dubai has established a Know Your Customer (KYC) blockchain consortium with six major banks. Dubbed “KYC Blockchain Consortium,” the new blockchain-powered regulatory platform is designed to accelerate processes like an exchange of digital customer data and documents while ensuring security.
Scheduled for launch in Q1 2020, the KYC Blockchain Consortium will purportedly become the first project of its kind in the region, the report notes. Ali Ibrahim, Deputy Director-General of the DED, outlined that the effort aims to bring more investment to the region:
“Our strategic alliance with banks to launch the first KYC blockchain platform in the UAE is an important step towards continuing to attract investors to this market.”
Additionally, the consortium-powered ecosystem hopes to boost business as well as regulatory compliance in the UAE. According to the report, the UAE Central Bank and Smart Dubai authority will be monitoring operations of the KYC Blockchain Consortium. The UAE’s newly reported blockchain comes in line with the general growth of blockchain spending in the region.
Governments across the Middle East and Africa region are projected to see at least a 400% surge in their investment to blockchain-based solutions in four years. In October 2019, the UAE accepted cryptocurrency regulation after releasing the draft law for public comment. As reported, the UAE has taken a very positive stance to the crypto and blockchain industry as the country is already hosting a number of blockchain-based initiatives such as digitized trade projects the “Digital Silk Road” and the document exchange platform known as the “Bank Trust Network.”
CBSG PoB Transactions With Their Cross-Carrier Payment System Successful
Further developments to blockchain technology are being tackled every day. One of the biggest challenges is how best companies working on blockchain can make their services not only accessible but also practical for users in different countries. The Carrier Blockchain Study Group (CBSG) Consortium is one such collaboration doing just that. Launched in September 2017, the group provides a secure way for telecom customers to make digital payments directly with their carriers using blockchain technology.
Blockchain platform TBCASoft, a founding member of the CBSG, announced in a Feb. 18 press release that Taiwan-based Asia Pacific Telecom Co. Ltd. (APTG) and a US mobile carrier successfully completed Proof-of-Business (PoB) payment transactions. Using the Cross-Carrier Payment System (CCPS), a blockchain network developed by TBCASoft, transactions can be paid directly in the user’s currency through their mobile carrier.
The CBSG worked with local merchants in Taiwan to complete transactions through APTG’s payment system, Gt Pay. All participants were mobile subscribers with a US-based carrier. APTG Vice President of Marketing Mei-Hui Teng commented on the success of the PoB:
“[We] will be one of the first carriers to launch the cross-border payment service and commercialize it in the Taiwan market. We foresee the strong growth of overseas travel and the popularity of the e-wallet service; our cross-border mobile payment service will create a considerable benefit to APTG’s subscribers. The service can help travelers reduce foreign transaction fees and enjoy the benefits of mobile cashless payments.”
They’re not the first blockchain platform to see the advantages of working together. Samsung Pay partnered with the payment platform Finablr on Oct. 3 to offer cross-border payments to its users.
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