A U.K.-based crypto-currency asset manager will launch next month its first third-party insurance services designed to provide guarantees around the potential theft of crypto assets.
Altairian Capital will launch its first safekeeping product, with insurers agreeing to provide cover for investors holding bitcoins and ether, with more coins and tokens to follow, says James Harris, co-founder and chief investment officer (pictured).
Among barriers to getting hedge funds, prop desks and the more daring asset owners to allocate to crypto assets, the biggest is custody. In recent weeks, a number of solutions have hit the marketplace.
Coinbase, the largest digital asset exchange in the U.S., went live with custody and prime-broker services. Nomura Securities also announced a partnership with Global Advisor Holdings, a crypto asset manager, and Ledger, a Paris-based maker of cold-storage hardware.
Investors can either leave their assets with an exchange, and take on their counterparty risk (including that of being hacked), or they can put their assets into cold storage and “self-custody”.
“That means your crypto becomes a free-of-payment bearer instrument, which terrifies financial institutions,” Harris said. This is a big reason why the approximately $400 billion crypto market is almost entirely retail, with virtually no fiduciary players (i.e., money held on behalf of a client).
Hence the race to solve such operational problems. “Custody is the new black in crypto assets,” Harris said.
A trader at a crypto over-the-counter market maker says institutional demand is there if these issues can be solved. The crypto market is no more than 1% to 2% of the size of the traditional hedge-fund world’s assets under management, but many hedge-fund founders have significant personal wealth tied up in crypto. Even more traditional asset owners, such as the Ontario Municipal Employees Retirement System, is backing a fund to invest in Ethereum-related startups.
Custody is the new black
“Once hedge funds and pension funds come on board, even if crypto is a tiny percentage of their benchmark, it will be a huge amount,” the trader said.
The costs of insurance
Coinbase’s public description of its prime and custody services mentions its cyber-security capabilities, and features such as multiple signatures, audit trails, segregation of duties and withdrawal limits. A third-party broker-dealer will offer auditing and financial reporting.
It doesn’t mention insurance, although one source in the insurance business tells DigFin he believes it is using it.
Self-insurance is expensive for investors, as they must keep a lot of capital in escrow in the form of collateral, and it still leaves an owner vulnerable to a hack. The costs to an exchange to self-insure are therefore far greater, given they would have to either cover all the assets they hold for many investors, or only cover a fraction of what could be stolen.
Harris declined to name the third-party insurers that will write policies for Altairian, or reveal the structure of those contracts. A crypto investor told DigFinhe believes the Altairian insurance will be around 3.5%.
Insurance is limited to cold storage only
Harris wouldn’t comment on the pricing, but acknowledges for now the service is expensive, because it is niche. “But you’d pay it as a financial institution if you want access to the asset class,” he said, likening crypto today to emerging-market assets, which also throw up operational problems and costs to trade. Gradually, he says, if more insurers write policies and the pie grows, prices will decline.
Tom Cain, Singapore-based regional director for financial services and professions at Aon, says the current capacity for crypto crime insurance is now $100 million to $150 million, sourced entirely from London. “It’s limited to cold storage only, and some multi-sig,” Cain said. “Coverage for warm storage [i.e. hot wallets] is presently unavailable,” although another $500 million to $600 million could unlock for covering cold-storage vault risk. (Aon brokers crypto crime policies, but Cain declined to say whether Altairian, Coinbase or others are end users.)
Altairian’s insurance covers not just against a hack, but also the cold-storage hardware it uses to safekeep crypto assets. It has had to prove to insurers its process for distributing assets across multiple cold-storage vaults in different locations. It also protects both owners as well as its own agents against crypto-jacking (physical assault).
We'll see a big investment bank go in
Harris says the firm’s goal is to add other services such as prime brokerage, asset management and coin lending. It is using its third-party insurance service as a means of leveraging itself into a broader crypto player, possibly even an exchange.
Lewis Fellas, chief investment officer at London-based Bletchley Park Asset Management, a crypto firm, says the proliferation of initiatives to address blockchain’s operational shortcomings are welcome – although whether they’re enough to entice traditional institutions is yet to be seen, given the high cost of protection currently available. One hurdle is cost; another is the fact that active traders will find it unwieldy to keep too many assets in cold storage.
He predicts by the end of the year, a major financial institution will surprise the market but buying a digital wallet vendor, put its own balance sheet into play, and buy its own insurance policies. “My guess is we’ll see a big investment bank go in with a proper prime brokerage and custody solution,” he said, adding a Japanese bank would have the clearest regulatory path.