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.


Development dilemma as eastern Greenland eyes tourism boost

Updated 30 sec ago

Development dilemma as eastern Greenland eyes tourism boost

KULUSUK, Denmark: Kayaking past blue-white icebergs drifting along near a pristine harbor, wandering around colorful houses or trekking in the snow-capped wilderness: July and August are high season for tourists in eastern Greenland.
Many of the 85,000 tourists who visit each year head to the west coast, but eastern Greenland, with its glaciers, wilderness and wildlife starring whales and polar bears, is also drawing visitors.
Sarah Bovet, a 29-year-old Swiss artist, said it’s hard to know what to expect.
“Thinking you’re going to be surprised, you are even more so in reality,” she said standing outside a hostel in the tiny village of Kulusuk.
Bovet was on an artistic residency in Greenland when she visited Kulusuk and its 250 souls.
Although she had imagined a small village before arriving, its stunning views and bright colors still came as a surprise.
With just one supermarket, an airport built in the 1950s by the US military to serve a Cold War radar base, and a harbor surrounded by brightly painted wooden houses, most of the villagers appreciate the extra revenue from tourism.
Justus Atuaq, a young hunter in Kulusuk, takes tourists out on sled tours in March and April — the spring high season — earning money that helps him feed and care for the dogs he uses for racing and hunting.
“Now I can take dogsleds for hunting, and sometimes tourists coming from other countries also want to dogsled,” he said outside his wooden house.

Residents in the village of Kulusuk welcome extra tourist revenue, but some worry about the effect of rising visitor numbers on the region’s wilderness. (AFP)

Tourists also take boat trips during the summer high season from July to August.
Arrivals to the island grew 10 percent year-on-year from 2014 to 2017, and three percent in 2018, according to the tourist board, Visit Greenland.
Many adventure seekers and nature lovers arrive by plane, but cruise ships also bring admirers, hugging the picture perfect coastline.
But they are not alone in taking an interest in the world’s largest island.
The Danish territory’s rich natural resources and growing strategic importance as the Arctic ice sheet melts have attracted the attention of US President Donald Trump.
The Arctic region has untapped reserves of oil, gas and minerals, as well as abundant stocks of fish and shrimp.
In August, Trump offered to buy Greenland, then called off a visit to Copenhagen over its refusal to sell.
Denmark colonized Greenland in the 1700s, granting it autonomy in 1979.
Today, many Greenlandic political parties advocate full independence.
The territory still receives an annual subsidy from Copenhagen, which was 4.3 billion Danish kroner (576 million euros) in 2017, and tourism could help it to become economically self-reliant.
Like many parts of Greenland, Kulusuk has no tarmac roads and visitors must travel by plane or boat.
The growth in tourism could put a strain on the village’s infrastructure, and the sector faces unique challenges given Greenland’s location, weather and the cost of traveling there.
Day tours of Kulusuk with flights from the Icelandic capital Reykjavik are 97,000 Icelandic kronur ($780, 700 euros).
Jakob Ipsen, a 48-year-old who grew up between Denmark and Greenland’s west coast, runs Kulusuk’s sole hotel.
The 32-room hotel stands beside a fjord, and from its dining room, guests can watch icebergs drift by during the summer.
But the region’s isolation can be problematic, Ipsen admits.
“We have to get all our supplies in with the first ship for the whole summer season, and for the winter season when everything is frozen over, we have to get all our supplies in with the last ship for the whole winter,” he said.
Greenland must tackle its infrastructure challenges if it wants to develop tourism, Visit Greenland says.
Government-funded work is under way to extend runways at the capital Nuuk and Ilulissat, both on the west coast, and a new airport is planned in the south.
The tourist body said it would weigh the environmental impact of boosting infrastructure, both on the environment and on local communities.
Ipsen worries about the effects of uncontrolled tourism to the region.
“We want to try to maintain it as it is, so it’s not exploding,” he said.
Already, said Johanna Bjork Sveinbjornsdottir, who runs tours in Kulusuk for an Iceland-based company, the rise in visitor numbers is making itself felt.
“In the campsites here out in nature where you used to be alone, there’s two, three groups at a time,” she said.
Like Ipsen, she is also concerned about the effect that rising visitor numbers could have on the wilderness around the village.
“If you want nature to survive that, you have to build up the infrastructure,” she said, pointing to the lack of officially designated campsites around Kulusuk, with no rubbish bins or toilets for travelers outdoors and no one supervising the sites.
Despite the concerns, Sveinbjornsdottir hopes visitors will keep coming.
“They go back as different people,” she said. “Everything is beyond what you ever imagined.”