News Risk Management09 Jan 2019

Asia:Cryptocurrency industry growth hindered by lack of insurance

09 Jan 2019

Cryptocurrency exchanges and traders in Asia are finding it tough to get insured against hacking and theft risks, a factor they say deters large fund managers from investing in the nascent market, reported Reuters.

With the crypto sector yet to be embraced by regulators, getting the buy-in from insurers would be an important step in industry efforts to show that it has solved the problem of storing digital assets safely following reputational damage from a series of thefts, and allow it to attract investment from mainstream asset managers.

Allianz chief economic adviser Mohamed El-Erian said that cryptocurrencies would gain wider acceptance as institutions began to invest in the space.

Many have held off investing citing regulatory uncertainty and a lack of faith in existing market infrastructure for storing and trading digital assets following a series of hacks and a plunge in prices—total market capitalisation of cryptocurrencies is currently estimated at approximately $120bn compared to over $800bn at its peak last January.

Regulatory uncertainty

Regulatory uncertainty is also another issue for large asset managers, as many regulators have raised concerns over cryptocurrency, yet few have clear policies on how they should be traded and by whom, said the Reuters report.

Insurance, though, might allay some of the regulators’ concerns around cyber security. Hong Kong’s Securities and Futures Commission recently said it was exploring regulating crypto exchanges, and signaled that the vast majority of the virtual assets held by a regulated exchange would need insurance cover.

Custody Challenge

With some $800m worth of cryptocurrencies stolen in 1H2018, another challenge is keeping crypto assets secure, which involves storing a 64 character alphanumeric private key. Losing the key effectively means losing the assets.

Assets can be stored online in ‘hot wallets’, which are convenient to trade though vulnerable to being hacked, or in ‘cold’ offline storage solutions, safe from hacks, but often inconvenient to access frequently, said Reuters.

Some institutions have already started working to solve this storage problem, including Fidelity, and a group including Japanese investment bank Nomura, which have launched platforms that will offer custody services for digital assets.          

Some cover available

Despite the industry’s complaints, some insurance coverage is already available, including at Lloyd’s. Aon also received several queries from exchanges and crypto vaults looking for cover.

However, insurers are still struggling to understand the new technology and its implications, noted one cryptocurrency broker cited in the report. Declining to be named due to sensitivity of the subject, he told Reuters that even those who are prepared to provide insurance would only offer limited cover.

“We’ve not yet found an insurer who will offer coverage of a meaningful enough size to make it worthwhile,” he said.

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