1/25

The story of insurance is one of the most overlooked and underrated signs in this space of a huge potential breakout.

But it& #39;s a bull signal that seems underwhelming if you& #39;ve never been an operator. https://twitter.com/CoinDesk/status/1384859118515769352">https://twitter.com/CoinDesk/...
2/25

Back in 2014, I worked at a, now defunct, Canadian Bitcoin exchange and we wanted to insure our assets.

While our average user didn& #39;t care, we were starting to onboard corporate accounts and VIP clients for the first time and this is something they were interested in.
3/25

What we soon realized was, there wasn& #39;t a lot of insurance for covering general deposit assets.

Most banks and other lenders depend on FDIC (or CDIC in Canada) which is the Federal Deposit Insurance Corporation.
4/25

FDIC covers your bank deposits up to $100k per account.

And, most banks have cleverly created multi-bank holding companies, where if your account had $200k in it, they& #39;d hold $100k and actually open an other account on your behalf at another bank to hold the next $100k
5/25

This program through Certificate of Deposit Account Registry Services (CDARS) allows most financial institutions to cover up to $20M for a single holder.
6/25

Then under Gramm-Leach-Bliley (GLB) Financial Modernization Act of 1999 this concept of "sweep accounts" came about that allowed financial institutions to provide FDIC insured deposit accounts as a backend service.
7/25

For example, when you deposit into a Robinhood account, until you purchase a stock, then your funds are likely insured by a bank accounts FDIC.

Afterwards they are insured by the Securities Investor Protection Corporation (SIPC) which strictly insures held investments.
8/25

So this means that all the financial, fintech and fintech companies are covered by either federal or non-profit collective based insurance programs.

So most private insurance companies don& #39;t have departments, policies or programs that cover deposited assets.
9/25

In fact, as I began to search, the closest thing I could find of insurance companies covering assets on loan was actually insurance companies that provided coverage for museums and art galleries, but they weren& #39;t willing to make the leap to digital assets.
10/25

Most insurance companies weren& #39;t even willing to provide us with regular business insurance or property insurance at first as they considered us a "financial institution"
11/25

To even get our regular coverage, we had to add security gates on all the doors, and have a certain standard of safe "for storing our Bitcoins in" which was empty because assets were stored in a cold wallet that wasn& #39;t even on site.

But no safe = no insurance.
12/25

Eventually, we were able to convince a very expensive insurance company who is known for their custom insurance on hard-to-place risks to provide us partial coverage at a painfully high rate.

But it was worth it as it drastically changed the appetite of commercial clients
13/25

I tell you all this to highlight that getting insurance on crypto is hard and expensive, and while its likely become a lot easier in the many years since I was exchange side, it still isn& #39;t an easy feat.
14/25

But, what you need to understand is that big buyers (and I mean *REALLY* big buyers) like institutions, pension funds, hedge funds, and wealth management funds, they don& #39;t play around with risk.
15/25

Global pension assets ($46T), Mutual Funds ($21.3T), and private asset funds ($108T), control the vast majority of idle capital in the world, and they are comfortable with 2% - 6% returns and extremely uncomfortable with any form of risk.
16/25

To get these types of institutions to even begin to consider making what they consider a & #39;high-risk& #39; investment with a fraction of their portfolio, you need to ensure that the asset is covered by a registered custodian (like BitGo)
17/25

And it needs to be fully insured.

Even if you manage to check those boxes, most of them won& #39;t bat an eye unless you& #39;ve got years of reputation, robust capital controls, and extensive security and that& #39;s only as a backstop.
18/25

Most of these institutions won& #39;t use a custodian as a primary broker. You need an experienced, reputable, value-add broker on top of all that who has robust securities and controls themselves.
19/25

Places like Coinbase Prime (and Coinbase Custody) and BitGo are getting there.

But getting insurance to cover this asset class (which if stolen can& #39;t be reclaimed) is tough and overwhelmingly expensive.
20/25

Even if you check all the boxes, there is a good chance an insurance company just says no anyway, because realistically you aren& #39;t worth the risk.
21/25

While we want to decentralize everything, the ability to get an insurance company to actually agree to cover these assets at this scale is a feat that smart contracts can& #39;t achieve. It& #39;s an accomplishment of a lot of human work and effort.
22/25

(Sure, we can have on chain insurance, but lets not kid ourselves, pension funds don& #39;t want that.)

Continuing to expand this insurance offering is huge, because it finally gives these massive funds to start dipping their toes in the pond.
23/25

If even 0.1% of these invested assets shifted into crypto, then it& #39;d be $0.17T of hard assets added to the space.

Given the average notional value to GMV on derivatives is 48x, then that would likely add $8.16T to the marketcap of crypto (a 4x from here)
24/25

Insurance policies for corporate custodians may seem boring, but they are really important to the space.

More importantly, they wouldn& #39;t add the capacity unless they were already seeing demand from corporate treasuries and large institutions.
25/25

As we come to the end of a filings season, I think we& #39;re going to see a lot more institutions and companies disclosing big crypto purchases, as we continue to become a legitimate asset class.
You can follow @adamscochran.
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