Cryptocurrency traders and exchanges in Asia are facing a new setback caused by insurance companies, according to a Reuters report.
Unlike the mainstream industry, crypto funds are more susceptible to the risk of hacks and thefts which are keeping insurers away from such risky businesses.
“Most institutionally minded crypto firms want to buy proper insurance, and in many cases, getting adequate insurance coverage is a regulatory or legal requirement,” said Henri Arslanian, PwC fintech & crypto leader for Asia, to Reuters.
A survey conducted by Greenwich Associates in September shows that 72 percent of institutional investors are optimistic about the cryptocurrency market and showed their interest to invest in the digital assets. However, the lack of any proper insurance is also keeping large fund managers away from the vulnerable yet highly profitable market and ultimately creating a barrier in the path of crypto to become part of the mainstream.
Sophisticated, Yet Vulnerable
Though based on some of the most advanced technology, the cryptocurrency industry has endured some of the largest thefts in the last couple of years. Japan’s largest crypto exchange Coincheck alone has suffered a loss of $532 million as a large chunk of NEM tokens were compromised by hackers affecting 260,000 platform users.
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Custodial challenges are also keeping the institutional investors away. Hoi Tak Leung, a senior lawyer in Ashurst’s digital economy practice, told Reuters: “Institutional investors who are interested in investing in crypto will have various requirements, including reliable custody and risk management arrangements.”
Cryptocurrency wallets are based on a trustless encrypted technology. So if the private key to the wallet – hot or cold – is lost, the funds are locked forever.
“Insufficient insurance coverage, particularly in a volatile industry such as crypto, will be a significant impediment to greater ‘institutionalization’ of crypto investments,” Leung added.
However, insurance companies are projecting a different picture. Reuters quoted Thomas Cain, regional director of commercial risk solutions at Aon’s Asian financial services and professions group: “It is not difficult to insure companies that hold large amounts of crypto assets, but given the newness of the asset class and the publicity some of the crypto breaches have received, applicants need to make an effort to distinguish themselves.”
Also, with the emergence of crypto specific custodial services, insurers are relaxing their requirements for protecting cryptocurrency funds.
“This year there have been a number of developments, and some providers have developed custody solutions suitable for institutional clients’ needs,” said Tony Gravanis, managing director of investments at blockchain investment firm Kenetic Capital. “Players at the top end of the market have also been able to get insurance.”