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Insurance opportunities in the blockchain ecosystem

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Source: Asia Insurance Review | Aug 2018

Asia Technology

As blockchain becomes more prevalent and cryptocurrencies gain increasing traction in the economy, the question of where insurers can find their place in this ecosystem begs for an answer.
By Zaki Ahmed
Over 2,000 initial coin offerings (ICO) took place in 2017, as the always forward-looking tech start-up culture embraces yet another cutting-edge technology. Serious money is involved in these projects, with Telegram ($1.7bn) and Ethereum ($1bn) as the most famous successes.
These funds are raised through the initial sale of the coins, also known as a token generation event (TGE) and the subsequent trading of the coins on the open market. Over the past two years, cryptocurrency exchanges have traded increasingly large volumes of coins, with modern exchanges seeing a flow of about $1bn each day. The current total value of the myriad cryptocurrencies surpassed $700bn in January and could reach $1tn by 2019.
Given the over-capitalisation of the market, (re)insurers need to look for a new, highly profitable line of business, and the crypto ecosystem represents such an opportunity. It is not without its challenges, as its limited history and limited pool of experts means that assessing its risk profile will be difficult. However, early entrants into this burgeoning market could reap great benefits, not only by tapping into a niche service, but also by setting trends and standards for future participants.
What type of cover would a start-up and its ICO require? According to Blockchain Warehouse CEO Adrian Guttridge, insurers could provide the following types of cover:
  1. Crime
  • Crime (cyber theft), including centralised custodial services with cold storage;
  • Cap and collar.
  1. D&O
  • In the event that shareholders sue directors.
  1. Professional indemnity
  2. Cyber liability
  • Blockchain is safe (at least until quantum computing becomes commonplace);
  • Currency exchanges are harder to safeguard.
Cryptocurrency hacks have gained more prominence and frequency over the past year, with increasingly large amounts of money stolen. However, those security flaws lie within the exchange, not within the blockchain, which remains inherently safe. Cryptocurrency exchanges, some of which are hastily put together to take advantage of the trend, can have glaring (to the expert eye) holes in their code or queueing process.
A start-up engaging in an ICO to raise capital will also have to contend with the risk of losing coins through theft, alongside the volatility of the crypto market. Its need for insurance is higher than ever, considering cryptocurrency exchanges provide no recourse against theft (although the high-profile thefts have seen the exchanges providing refunds to all affected users, which often results in the shuttering of the exchange).
The highly volatile and speculative nature of cryptocurrency investment, as well as the uncertain state of regulations means ICOs are a higher risk class than traditional IPOs. The lack of solid regulation on ICOs means that losses from fraudulent campaigns cannot be recovered. As governments around the world begin to firm up their regulations on ICOs and cryptocurrency exchanges, insurers might have an easier time exploring this market. A 
Are ICOs regulated? 
ICOs are allowed in Australia but if an ICO or cryptocurrency falls under the Corporations Act, additional disclosures are triggered. For instance, an ICO might trigger a disclosure requirement if the ICO is a managed investment scheme. A few other possible triggers of the Corporations Act include, for instance, if the ICO is being offered as a share of a company, as a directive, or as a non-cash payment.
The People’s Bank of China banned all ICO activities in 2017 and ordered cryptocurrency exchanges to shut down. According to several reports released earlier this year, China is preparing a set of regulations to take effect in 2018 that would allow ICO activity to resume.
Hong Kong
ICOs are allowed in Hong Kong. Regulators have said that certain tokens might be securities and will be treated as such.
Last year, the Financial Services Authority said that, depending on the structure used, ICOs may fall under regulation including by the Payment Services Act and the Financial Instruments and Exchange Act. The authority is reportedly considering ICO regulations. Japan introduced cryptocurrency regulations last year, recognising them as a legal method of payment. The law requires that cryptocurrency exchanges hold a special license to operate.
ICOs are allowed in the Philippines but regulators have said that some tokens might be considered as securities and thus must comply with securities registration regulations. The Philippines Securities and Exchange Commission is currently crafting rules to regulate cryptocurrency transactions. 
ICOs are allowed in Singapore. Last year, the Monetary Authority of Singapore (MAS) released guidelines regarding cryptocurrencies and ICOs. The guidance dictated that cryptocurrencies that are ‘capital market products’ under the Securities and Futures Act can be regulated by the MAS. This includes cryptocurrencies that either infer an ownership interest in a corporation or product, debt, or a share in an investment scheme.
South Korea
Following China’s lead, South Korea’s Financial Services Commission announced in September 2017 the prohibition of ICOs, but recent reports suggest that the ban could be eased in the coming months. Thailand
ICOs are allowed in Thailand but are unregulated. The central bank is preparing a framework for regulation.
European Union
In the EU, ICOs are allowed, given they are in adherence to AML/KYC policies and other required business regulations and licenses.
United Kingdom
ICOs are allowed in the UK. The UK Financial Conduct Authority has issued warnings to investors stating that ICO projects are still experimental and therefore pose risks to investors. It has said that securities law and other areas of financial or banking law may apply to the issuance of a token depending on the different aspects and rights the token holder obtains through holding it.
United States
ICOs are allowed in the US but regulations vary widely from state to state. On the federal level, ICOs should be registered and licensed as if they were not ICOs. This includes registering with the Securities and Exchange Commission if the ICO is to sell or trade securities. ICO organisers are also expected to adhere to AML/KYC practices.
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