HONG KONG (Reuters) – Cryptocurrency exchanges and traders in Asia are struggling to insure themselves against the risk of break-ins and theft, a factor which they claim is the quenching of large fund management companies investing in an emerging market yet to be embraced by the regulators.
FILE PHOTO: Broken representations of the virtual currency Bitcoin, posted a screen of binary digits, can be seen in this image figure 8 December 2017. REUTERS/dado Ruvic/Illustration
To the buy-in of insurers would be an important step in the crypto-industry efforts to demonstrate that it is solved the problem of storing digital assets are safe after the reputational damage of a series of thefts, and let the attracting investment from the mainstream asset managers.
“The most institutionally minded crypto companies want to buy the right insurance, and in many cases, obtaining sufficient insurance coverage is a statutory or other legal requirement,” said Henri Arslanian, PwC fintech & crypto leader for Asia.
“However, getting such coverage is nearly impossible despite their best efforts.”
Many asset managers are interested in digital assets. A Greenwich Associates survey, published in September, says 72 percent of the institutional investors who responded to the research firm believe crypto has a place in the future.
Last month, Mohamed El-Erian, Allianz’s main economic adviser said that cryptocurrencies could gain broader acceptance as the institutions began to invest in the space.
Most have held off investing until now, however, citing legal uncertainty and a lack of confidence in the existing market infrastructure for the storage and trading of digital assets after a series of hacks, and the dip in the prices.
The total market capitalization of crypto currencies is currently estimated at around $120 billion, compared with more than $800 billion at its peak in January.
“Institutional investors who are interested in investing in crypto will have different requirements, including reliable storage and risk management,” said Hoi Tak Leung, a senior lawyer in Ashurst’s digital economy practice.
“Inadequate insurance cover, particularly in a volatile sector such as crypto, will be a major obstacle for a greater ‘institutionalisation’ of crypto-investments.”
Regulatory uncertainty is another problem for the large asset managers. While crypto currencies raise a number of concerns for policymakers, including money laundering risks, with few clear frameworks for how cryptocurrencies should be traded, and by whom.
The insurance can take away a number of the supervisors concerns around cyber security. Hong Kong Securities and Futures Commission recently said it was exploring the regulation of crypto-exchange, and indicated that the vast majority of virtual assets held by a regulated stock exchange should insurance.
THE AUTHORITY CHALLENGE
The love of crypto assets safe and secure is to store a 64 character alphanumeric private key. If the key is lost, the assets are effectively lost.
Assets can be stored online, in the so-called hot wallet, and that is useful for trade but vulnerable to be hacked, or in “cold” offline storage solutions, safe hacks, but it is often hard to access often.
More than $800 million worth of crypto currencies were stolen in the first half of this year, according to data from the Autonomous FOLLOWING, a financial research firm.
Some institutions have started working to resolve this issue, and may be intense competition for the established players.
This year, Loyal, and a group including the Japanese investment bank Nomura (9716.T) have launched platforms that will offer custody services for digital assets.
Despite the industry’s complaints, the insurers say that they do offer coverage. Risk advisor Aon, received about two-dozen questions this year of exchanges and crypto-vaults looking for an insurance policy, according to Thomas Cain, regional director, commercial risk solutions at Aon, the Asian financial services and professions of the group.
“It is not difficult to ensure that companies with large amounts of crypto assets, but given the newness of the asset class and the publicity that some of the crypto-breaches have received, applicants need to make an effort to differentiate themselves,” Cain said.
The sector says also getting closer to the resolution of the custody issue.
“This year there are a number of developments, and some providers have developed authority solutions suitable for institutional customers,” said Tony Gravanis, director of investments at blockchain firm Kenetic Capital.
“Players at the top end of the market are also able to get insurance,” he said.
But this is not the case for all.
A cryptocurrency broker, declining to be named because of the sensitivity of the subject, said insurers are struggling to understand the new technology and the consequences thereof, and that even those who were willing to take insurance would provide only limited coverage.
“We have not yet found an insurance company that provides coverage of a meaningful enough size to make it worthwhile,” he said.
Reporting by Alun John, editing by Jennifer Hughes and Shri Navaratnam