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Crypto Insurance May Soon Become the Norm

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Crypto Insurance May Soon Become the Norm

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.”

Self-capitalized funds

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.

Bitcoin News

Africa Using Blockchain to Drive Change All Over Continent

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Africa Using Blockchain to Drive Change All Over Continent
Africa Using Blockchain to Drive Change All Over Continent

With pundits like Twitter CEO Jack Dorsey predicting that Africa “will define” the future of Bitcoin (BTC), cryptocurrency and blockchain technology continue to attract interest from both public and private establishments across the continent. Many of these adoption cases have been moving beyond finance, developing solutions targeted at issues like unemployment, identity management, health care and supply chain, among others. 

Amid the growing enthusiasm for crypto and blockchain technology in Africa, industry stakeholders identify a lack of education as one of the major hurdles standing in the way of more broad-based utilization of the technology. The absence of clear-cut regulations and minimal support from various governments have also had a negative impact on the rollout of pilot projects that could provide solutions to some of the problems plaguing the continent.

According to data from the World Economic Forum, Africa has the world’s youngest population. Of the top 20 nations with the lowest median age, the only non-African nation is Afghanistan, with Niger having a median age of a little above 15 years — about half of the global average. Such a high concentration of a young demographic presents opportunities for an increase in the adoption of emerging technologies as seen in the mobile market boom across the continent. Indeed, Africa is reportedly the fastest-growing mobile market in the world.

Blockchain technology has the potential to follow the trajectory already set by mobile telephones in Africa. Apart from digital currency systems being used for cross-border remittance, several projects in Africa have been exploring blockchain-based solutions to problems that have eluded solutions for decades. All of the industry stakeholders interviewed about the state of blockchain utilization in Southern Africa agree that there is an ongoing narrative shift. 

Mobile money, Bitcoin driving down African remittance costs ...

While the initial focus of many projects was on payments and crypto trading, several startups have started examining non-financial use cases for decentralized ledger technology-based systems. Commenting on the pivot toward other DLT use cases, Chris Cleverly, the CEO of Kamari, a blockchain payment and gaming platform, revealed that it was a new development that only began taking shape in the last 12 months. In a recent communique, they cleverly remarked:

“In South Africa, the majority of blockchain growth until a year ago was all focused on trading and banking and generally the financial side of the sector. Lately though, there have been a wide variety of use cases emerging that are focused on media technology.”

Cleverly also revealed that blockchain technology is being applied in the development of Africa’s renewable energy ecosystem, adding: “The Sun Exchange is another fascinating nontraditional financial use case for renewable energy.” According to Cleverly, “They created the world’s first peer-to-peer leasing platform that enabled anyone in the world to invest anywhere to create solar energy arrays, all maintained and enabled by blockchain technology.” Launched in 2015 in South Africa, The Sun Exchange enables the monetization of sunshine — one of the continent’s most abundant resources — with an estimated 2,000 kilowatt-hour per square meter reaching the surface on an annual basis. Via DLT, The Sun Exchange is able to create a platform for P2P solar cell micro-leasing for schools and businesses in Africa. 

At the intersection of blockchain technology and renewable solar energy, several startups have identified a viable channel to light up Africa, with a special focus on rural areas historically poorly served by their respective national grids. Data from the U.N. shows Africa’s electricity generation is the lowest in the world for a population of over 1.3 billion people.

Many of these projects use similar business models that allow customers with solar panels to sell excess energy to residents. Projects like OneWattSolar even utilize tokenized assets to make payments, thus bringing digital currency adoption even closer to the masses. The consumer-driven energy sector is taking off not only in Southern Africa but across the rest of sub-Saharan Africa with the aim of addressing the needs of approximately 58% of the population — which has little or no access to electricity. Amid the blockchain-based solar power revolution in Africa comes the potential for a significant transition toward cleaner energy sources, especially at a time when environmental scientists have been clamoring for a reduction in fossil-fuel dependence.

Part of this expanding utilization of blockchain technology appears to be coming from an improved perception of the technology by governments and private establishments in Africa. Grey Jabesi, the director of business development at the United Africa Blockchain Association, a Pan-African blockchain organization said:

“Leaders and decision-makers from both government and private institutions used to negatively associate blockchain with cryptocurrency, which made them hesitant to explore the technology or work with blockchain startups. This decelerated the adoption of the technology but now, most of them have realized the potential of blockchain and are exploring ways to implement it into their business if necessary. Blockchain startups are also starting to get institutional recognition and funding.”

According to Jabesi, blockchain adoption in identity management is one of the leading real-world use cases for the technology in Southern Africa. Figures from the World Bank show that more than 1 billion people across the world do not have any official identification.

This identity management crisis is one of the reasons why a significant percentage of the global population remains unbanked. However, problems with robust identity systems are not restricted to Africa alone: case in point, the “Windrush scandal” of 2018 in the United Kingdom. Figures from both the World Bank and UNICEF put birth registration — the most fundamental form of official national identity — in Africa at 50%. According to UNICEF, the situation is particularly worse in Eastern and Southern Africa where the birth registration of children under five years of age has dropped to 40%. In a conversation, Nini Moru, the executive coordinator at the Africa Blockchain University of Southern Africa, revealed that startups are already leveraging DLT solutions to improve identity management in the region:

Child Rights and Global Supply Chains | CEO Water Mandate

“FlexFinTx is working on self-sovereign identities for Africans who don’t have forms of identification and thus are restricted from accessing services such as health care, insurance and banking. It’s using Algorand’s blockchain to make sure that the identities are tamper-proof and self-sovereign.”

Back in February 2020, FlexFinTx became the first African company to join the Decentralized Identity Foundation — a coalition of establishments looking to leverage DLT for Self Sovereign Identity. The company has partnered with tech giants like IBM and Microsoft in the deployment of its FlexID through WhatsApp, a system that is already helping Zimbabweans get easier access to banking and health care services. Speaking at the Blockchain Africa conference earlier this year, Victor Mapunga, the CEO and co-founder of FlexFinTx, highlighted the need for novel identity management systems not to neglect the protection for sensitive user data. During his address at the conference, Mapunga revealed that FlexID users have total control over how their information is shared.

Blockchain adoption has also been growing in the continent’s health sector. A combination of factors such as lack of political will, corruption, poor allocation of resources and maintenance culture, as well as an insufficient number of medical professionals has seen health care remain a challenge for the vast majority of people living in Africa. While the problems are well-known, creating lasting solutions has remained unattainable for several stakeholders looking to improve the situation. However, via blockchain technology, health care companies in Africa have been working toward providing aid to those hardest hit by years of government neglect. Commenting on some of the significant blockchain-based advances in African health care service delivery, Cleverly remarked that his company seeks to develop a digital medical data marketplace, adding:

“Kamari has also been involved in programs to promote and encourage HIV testing across Africa through crypto incentives. The real promise here is through community engagement through blockchain tech.”

With lower HIV, malaria and fewer respiratory tract infections, like tuberculosis, among the leading causes of death in Africa, some companies have been leveraging blockchain technology to decentralize the flow of information and care for the continent’s most vulnerable demographic. Platforms like KinectHub have created a tokenized ecosystem to reward participants working to improve the continent’s health care sector. These projects also create electronic health records that accurately capture the medical histories of patients — a privilege hitherto only available to wealthy Africans. Blockchain technology provides a robust security infrastructure that ensures sensitive data won’t be compromised. 

Access to potentially life-saving medication is also another significant health care challenge in Africa. According to the U.N., people in Africa mostly consume imported drugs, with only 2% of the supply produced on the continent. This statistic becomes even more alarming when considered against the backdrop of India and China — places with similar population densities, only importing 5% and 20% of consumed drugs, respectively. Exacerbating this already difficult situation is the proliferation of counterfeit medicines. According to a study by the London School of Hygiene and Tropical Medicine, up to 158,000 malaria deaths per year in Africa are caused by fake anti-malaria medication. With blockchain technology showing some promise in the area of traceability, projects have been applying the technology directly in the African pharma supply chain. As previously reported, Uganda’s government partnered with blockchain pharmaceutical startup MediConnect back in July 2019 to trace fake drugs in the country.

While these projects have tackled various problems, there appears to be a shifting tide in the approach to solving the developmental issues plaguing the continent. With Africans leading the charge, the solutions created by these startups have a much higher probability of being tailored to specific African peculiarities. Cleverly touched on this subject, using developments in the supply chain arena as an example:

“Another fascinating blockchain company is fuzoDNA, a blockchain platform for supply chain management. The potential commercial and psychological value for Africa to upgrade its supply chain management from its current colonial-era system is hard to understate. Transforming this sector for Africans/by Africans would transform Africa and place it at the center of its own economy.”

As previously reported, one of the key takeaways from the 2020 edition of the Blockchain Africa conference was the importance of education as an important adoption driver for the technology on the content. Commenting on the major issues for more broad-based DLT adoption in Africa, Moru remarked:

“I think major pain points in Southern Africa range from the regulatory landscape, lack of understanding and cost of implementation. In regards to regulatory landscape, I believe it goes hand in hand with lack of understanding. Lack of understanding of the technology leads to regulators not being able to come up with relevant laws and regulations to support blockchain projects.”

Apart from these problems, African blockchain developers also navigate challenges like scalability and limited interoperability with legacy systems. Industry stakeholders will be hoping that these issues are not sufficient to dampen the enthusiasm of projects looking to utilize the emerging technology in finding lasting solutions to the continent’s major problems.

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Gamers In Quarantine Are Straining Microsoft Azure-based Blockchain Platform

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Gamers In Quarantine Are Straining Microsoft Azure-based Blockchain Platform
Gamers In Quarantine Are Straining Microsoft Azure-based Blockchain Platform

Microsoft has acknowledged that the quarantined gamers are putting a strain on its Azure cloud platform which is a backbone of the company’s Blockchain As a Service (BaaS) offering. In the SEC filing, Microsoft addresses the impact of “the global health pandemic” on its Azure cloud services. The company admits that in certain regions “deployments for some compute resource types (…) drop below our typical 99.99 percent success rates”. Furthermore, Microsoft confirms that “Xbox Live [is] putting a strain on overall Azure capacity:”

“As a result of the surge in use over the last week, we have experienced significant demand in some regions (Europe North, Europe West, UK South, France Central, Asia East, India South, Brazil South) and are observing deployments for some compute resource types in these regions drop below our typical 99.99 percent success rates.”

However, the company has not been forced to change its prioritization criteria, still giving precedence to emergency services. A Microsoft spokesperson said that the company has “nothing to share beyond the Microsoft Azure blog.”

Azure users can deploy a blockchain network, including Bitcoin (BTC), in the cloud without having to invest in their own hardware infrastructure. Among its clients are GE Aviation, J.P. Morgan, and its own Xbox. Meanwhile the demand for the Bitcoin network is at the lowest point since “crypto winter.”

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Altcoin News

Traditional Traders More Interest in Crypto

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Traditional Traders More Interest in Crypto
Traditional Traders More Interest in Crypto

A survey published on March 31 revealed that senior trading executives believe that large companies in the business would be interested in taking advantage of the recent crypto plunge, particularly Bitcoin (BTC). According to the Adoption of Digital Asset Trading report published by Acuiti management intelligence platform, about 100 venues capable of trading cryptocurrencies have launched for institutional clients. The survey shows greater adoption of digital assets among sell-side service providers (26%) than traditional trading firms (17%). However, it clarified that the adoption rates are limited to the CME or Bakkt.

All the crypto trading firms that were studied in the report realized that there was a growing interest in Bitcoin derivatives. About 57% of traditional trading firms have traded Bitcoin, while 29% traded Ethereum (ETH) derivatives. One of the findings of the survey is that although XRP is being ranked as the eighth most popular digital asset, XRP/USD was ranked 5th in the ranking of the preferred cryptocurrency pair within institutional firms. Their top three primary considerations are liquidity, volatility, and arbitrage opportunities.

One of the biggest concerns among all trading institutions surveyed, including those still waiting to trade digital assets like cryptocurrencies, was the security vulnerabilities of exchange and fears over hacking. Another concern detailed in the report is fear of reputational damage, which is why many trading institutions do not want to offer digital assets among their portfolio. Although the survey still believes that adoption rates remain low, the future looks bright in terms of adoption. 97% of traditional trading firms are considering trading digital assets within the next two years.

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