What is stalling the cryptocurrency industry in Asia?
WHILE it is still in its nascent stage, and in spite of regulatory crackdown in China, Asia’s significance to the cryptocurrency is massive.
However, the exchanges and traders in the region have a hard time protecting themselves against hacks and theft, something which they claim keeping large fund managers at bay.
The industry has suffered severe reputational damage due to a series of large-scale heists and thefts, and the approval from insurers would be a significant step towards assuring consumers that it had solved the safety issue surrounding the digital asset and enable it to attract mainstream investments.
PwC fintech and crypto leader for Asia, Henri Arlanian according to a Reuters report said that most crypto firms that are institutionally minded seek to obtain proper insurance coverage and in a lot of instances, it is required by the law.
“However, getting such coverage is almost impossible despite their best efforts,” he was quoted as saying.
To make things worse, many asset managers are keen on investing in digital assets, as one survey claims that up to 72 percent of institutional investors believed that there is a future in cryptocurrencies.
Mohamed El-Erian, Allianz’s chief economic adviser recently said that as more institutions invest in the space, the crypto industry would become widely accepted.
But, most have refrained thus far.
Regulatory uncertainties and a lack of trust in the current infrastructure to facilitate secure trading and storage is often cited as reasons, in light of recent hacks and thefts that amounted to a billion dollars last year.
At present, the market capitalization of the cryptocurrencies is estimated to at US$120 billion and was at its peak in January last year with over US$800 billion.
Meanwhile, Hoi Tak Leung, a senior lawyer in Ashurst’s digital economy practice explained that institutional investors generally have many requirements that they need to consider, which include reliable custody and risk management arrangements.
“Insufficient insurance coverage, particularly in a volatile industry such as crypto, will be a significant impediment to greater ‘institutionalization’ of crypto investments,” Hoi said.
Another challenge that asset managers face is the regulatory uncertainties surrounding the cryptocurrencies. Regulators, while having concerns over the increased risks of money laundering, have thus far failed to establish a legal framework or guidelines on how cryptocurrencies should be traded.
Insuring the assets, however, might alleviate some concerns.
Recently, Hong Kong’s Securities and Futures Commission had announced a comprehensive set of guidelines to govern crypto exchanges and indicated that a majority of the digital assets held by exchanges require insurance protection.
Secure custody issues
Securing crypto assets involves storing 64 characters alphanumeric private key and the loss of the key means loss of the asset.
Generally, the asset is stored online in something called “hot wallets” that enable easy trading but is susceptible to be hacked and stolen, while offline storage makes it difficult to be traded.
Solution in sight
Aon’s Asian financial services and professions group regional director, commercial risk solutions Thomas Cain said that the risk advising company had received some two dozens inquiries last year from crypto exchanges seeking to insure their assets.
“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.
Beyond that, the solution to the custody issues is also within reach as some providers have come up with custody tools that are suitable for institutional clients, allowing them to be insured.
In conclusion, while it may not be as straightforward for the crypto players to get their assets insured at the moment, it seems as if the key lies with developing a more secure infrastructure to instill investors’ confidence.
And thus, increased collaboration between solution providers, cryptocurrency exchanges and regulators is significant to develop a secure environment for institutional investments as well as for the cryptocurrency space to thrive in this region a beyond.