Cryptocurrency industry faces insurance hurdle to mainstream ambitions

Last month, Mohamed El-Erian, Allianz’s chief economic adviser said that cryptocurrencies would gain wider acceptance as institutions began to invest in the space. (File/FAP)
Updated 20 December 2018

Cryptocurrency industry faces insurance hurdle to mainstream ambitions

  • Over $800 million worth of crypto currencies were stolen in the first half of this year
  • Insurers struggled to understand the new technology and its implications

HONG KONG: Cryptocurrency exchanges and traders in Asia are struggling to insure themselves against the risk of hacks and theft, a factor they claim is deterring large fund managers from investing in a nascent market yet to be embraced by regulators.
Getting the buy-in from insurers would mark an important step in crypto industry efforts to show that it has solved the problem of storing digital assets safely following the reputational damage of a series of thefts, and allow it to attract investment from mainstream asset managers.
“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.
“However, getting such coverage is almost impossible despite their best efforts.”
Many asset managers are interested in digital assets. A Greenwich Associates survey, published in September, said 72 percent of institutional investors who responded to the research firm believe crypto has a place in the future.
Last month, Mohamed El-Erian, Allianz’s chief economic adviser said that cryptocurrencies would gain wider acceptance as institutions began to invest in the space.
Most have held off investing so far however, citing regulatory uncertainty and a lack of faith in existing market infrastructure for storing and trading digital assets following a series of hacks, as well the plunge in prices.
The total market capitalization of crypto currencies is currently estimated at approximately $120 billion compared to over $800 billion at its peak in January.
“Institutional investors who are interested in investing in crypto will have various requirements, including reliable custody and risk management arrangements,” said Hoi Tak Leung, a senior lawyer in Ashurst’s digital economy practice.
“Insufficient insurance coverage, particularly in a volatile industry such as crypto, will be a significant impediment to greater ‘institutionalization’ of crypto investments.”
Regulatory uncertainty is another problem for large asset managers. While crypto currencies raise a number of concerns for regulators, including money laundering risks, few have set out clear frameworks for how cryptocurrencies should be traded, and by whom.
Insurance might allay some of the regulators’ concerns around cybersecurity. Hong Kong’s Securities and Futures Commission recently said it was exploring regulating crypto exchanges, and signalled that the vast majority of the virtual assets held by a regulated exchange would need insurance cover.
Custody challenge
Keeping crypto assets secure involves storing a 64 character alphanumeric private key. If the key is lost, the assets are effectively lost too.
Assets can be stored online, in so-called 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.
Over $800 million worth of crypto currencies were stolen in the first half of this year according to data from Autonomous NEXT, a financial research firm.
Some institutions have started working to solve this problem, and may provide fierce competition to the incumbent players.
This year, Fidelity, and a group including Japanese investment bank Nomura have launched platforms that will offer custody services for digital assets.
Despite the industry’s complaints, insurers say that they do offer cover. Risk adviser Aon, received some two dozen inquiries this year from exchanges and crypto vaults seeking insurance, according to Thomas Cain, regional director, 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,” Cain said.
The industry also says it is getting closer to solving the custody problem.
“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 investments at blockchain investment firm Kenetic Capital.
“Players at the top end of the market have also been able to get insurance,” he said.
But this is not the case for all.
One cryptocurrency broker, declining to be named because of the subject’s sensitivity, said insurers struggled to understand the new technology and its implications, and that even those who were 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.


Virus pressure tests Saudi Arabia reforms as Aramco has Forbes debut

Updated 28 May 2020

Virus pressure tests Saudi Arabia reforms as Aramco has Forbes debut

  • ‘In terms of profits, the Saudi companies have done well. We will see more companies rising in the next few years

RIYADH: Saudi companies such as oil giant Aramco are displaying resilience in the face of the coronavirus pandemic because of reforms introduced before its arrival, say analysts.

The world’s largest oil company has become emblematic of wider corporate reforms triggered by the Saudi Vision 2030 blueprint for social and economic change.

Saudi Aramco this month appeared in the top five of the Forbes Global 2000 list, which ranks the world’s 2000 largest companies.

It comes as the world’s most profitable company reported profits on $88.2 billion last year.

This year’s rankings arrive amid a global pandemic which has devastated the earnings of some companies, improved the position of others and tested the resilience of all.

It has also shone a spotlight on the ability of the the Kingdom’s top companies to withstand the twin shock of the COVID-19 lockdown and the collapse of oil prices.

Saudi Aramco debuted on the prestigious Forbes list after completing the world’s largest initial public offering last year.

The rankings are based on a combination of sales, profits, market capitalization and assets. Three of the top five companies on the list are from China, including Industrial and Commercial Bank of China in the top spot for the eighth straight year with more than $4.3 trillion in assets.

Forbes noted that many of the companies on its list have come through a particularly difficult first quarter as a result of the COVID-19 pandemic, or what it describes as “The Great Cessation.”

“Many companies and organizations have faced difficulties in managing and mitigating the impact of COVID-19 crisis. However, there are some companies that have prepared well and put in action plans to avoid this crisis with the least damage,” said Fahad Alfaifi, a Saudi-based strategy and business planning consultant.

The pandemic has come at a time of historic change in the Kingdom’s corporate landscape driven by economic reforms which form a major part of the Vision 2030 agenda. This aims to reduce the country’s reliance on oil revenues and stimulate investment in sectors of the economy that create new jobs for a youthful population.

This backdrop has meant many companies in the Kingdom were already changing the way they did business before the arrival of the pandemic and the collapse of oil prices created new challenges.

Last year’s annual Global Competitiveness Report, issued by the World Economic Forum, placed the Kingdom third among G20 counties and 11th globally

in terms of IT governance which rates a country’s ability to adapt digital technologies such as e-commerce and financial technology.

Such technology skills are becoming increasingly important for economies as they to re-calibrate and adapt to the post-pandemic world.

Nasser Al-Qarawee, the director of the Saudi Study and Research Center, attributed the success of some Saudi companies to the great achievements made by the private sector lately and predicted that more Saudi companies would eventually join Aramco on the Forbes list.

“The national economy has seen enormous improvements and development in terms of laws and legislation that have helped reduce restrictions and bureaucracy, while the government has worked at the same time on reducing dependency on oil. Vision 2030 will further cement the Kingdom’s strong presence globally and make it have a larger influence on global decisions, not only economically but also politically.”

Tawfiq Al-Swailem, CEO of the Gulf Bureau for Research and Economic Consultations, said that many Saudi companies would emerge from the pandemic in a strong position.

“In terms of profits, the Saudi companies have done well, although the entire world is living through a state of ferocious economic war,” he said. “We will see more Saudi companies rising in the next few years.”