Breaking the Ice in Crypto: are we ready for Insurance?

by Gintautas Scerbavicius

Over the years, we have witnessed many hacks, violations, frauds, and lots of money disappearing virtually overnight. Transparency still remains one of the greatest challenges in  crypto businesses. Criminal activities, like exchange hacks or ICO scams, as we have seen in the past, have greater implications for the prices of cryptocurrencies and the general crypto market as a whole. Crypto custody could help to sort this problem out.

Introducing custody services

Custody services are among the latest innovations in the cryptocurrency ecosystem. Some believe that the introduction of custody services will facilitate the inflow of institutional capital into this relatively new industry.

Simply put, crypto custody means that a third-party provides storage and security services for cryptocurrencies. It is not only important but also a necessity if we want to live in a world where trading cryptocurrencies is safe and secure. Most importantly, the custody service would allow big players to enter this relatively novel financial market and start trading.

The third-party providers of storage and security services for cryptocurrencies can enable institutional investors who hold copious amounts of cryptocurrencies to start trading in a safe and secure manner. There are different crypto custody solutions, including the ones securing the hot storage and those that aim to secure cold storage.

Protecting the Investors

Since there are a lot of risks involved in holding and trading cryptocurrencies, the fact that there are still no viable crypto custody solutions is surprising. There is a rumor of some stealth operations that are still waiting to see the light of day. Until then, institutional investors have their hands tied as the security and the efficiency they need is still not at the required level.

The crypto custody solutions market is relatively new but it’s evolving quickly. Some third-party custodians are still working on developing their services, but at the same time, institutional investors are not quite clear about what features they would like to see in this service.

Custody Solutions and Insurance

The crypto custody service has not taken its final form. The market is still evolving and since there are too few firms that offer it, the services are still very expensive. It is a vicious circle – since the service is not affordable, there are only a few willing to pay such a high price.  

Furthermore, these companies don’t offer the complete service. In most instances, these services are strictly based on insurance. To become more attractive to the big players in the crypto world, crypto custody service providers have to learn to operate in the crypto space.

What do crypto custody service providers have to do to attract more institutional capital?

Insurance has to become a standard

First of all,  insurance has to become the industry standard. All other financial sectors already have this commodity. To drive institutional investment in the crypto market, the crypto sector has to offer secured and insured digital assets storage. This will preserve the interests of investors and bring greater trust in the industry as a whole.  

It is not just a bare-bones idea. For instance, just at the beginning of October,  a major crypto exchange Gemini, based in New York, obtained insurance coverage from a consortium of leading insurance providers led by Aon. Aon is a multinational, multi-billion dollar insurance behemoth.

Yusuf Hussain, Head of Risk at Gemini, stressed the importance of providing sufficient consumer protection to assure that investors can freely trade cryptocurrencies without the possibility of fund theft on the platform.

The second important aspect of crypto custody service – security. Security of hot storage, warm storage, cold storage, and all of the transactions. Before providing their capital, major players want to make sure that the operational risk is at a minimum, and without proper security, policy service providers will continue failing to attract them.

Facing the inevitable – smart regulation

And at last, we come to the regulation part, the third factor that will drive more institutional buyers to invest in crypto businesses. Crypto custodians and the government can learn a lot from the global custodians that have been guarding the cash and securities for institutional investors so far, such as JPMorgan, State Street Corp, BNY Mellon, and many others.

The legal framework has to be drawn before the big players can enter the crypto courtyard. There are several crypto custody service providers that are already in negotiations with the Financial Industry Regulatory Authority (FIRA) and Securities and Exchange Commission (SEC). We assume that we will soon see the first custodian qualified by the official regulatory body.

HODL Finance is the European digital lending company. HODL Finance issues loans backed by cryptocurrency and other digital assets. Founded by the shareholders of the peer-to-peer lending platform, Savy, HODL Finance now serves clients around the world.

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