Read on Twitter
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's a bull signal that seems underwhelming if you've never been an operator. https://twitter.com/CoinDesk/status/1384859118515769352
The story of insurance is one of the most overlooked and underrated signs in this space of a huge potential breakout.
But it's a bull signal that seems underwhelming if you've never been an operator. https://twitter.com/CoinDesk/status/1384859118515769352
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't care, we were starting to onboard corporate accounts and VIP clients for the first time and this is something they were interested in.
Back in 2014, I worked at a, now defunct, Canadian Bitcoin exchange and we wanted to insure our assets.
While our average user didn'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'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.
What we soon realized was, there wasn'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'd hold $100k and actually open an other account on your behalf at another bank to hold the next $100k
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'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.
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.
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.
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't have departments, policies or programs that cover deposited assets.
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'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't willing to make the leap to digital assets.
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't willing to make the leap to digital assets.
10/25
Most insurance companies weren't even willing to provide us with regular business insurance or property insurance at first as they considered us a "financial institution"
Most insurance companies weren'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't even on site.
But no safe = no insurance.
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'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
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't an easy feat.
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'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't play around with risk.
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'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.
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 'high-risk' investment with a fraction of their portfolio, you need to ensure that the asset is covered by a registered custodian (like BitGo)
To get these types of institutions to even begin to consider making what they consider a 'high-risk' 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't bat an eye unless you've got years of reputation, robust capital controls, and extensive security and that's only as a backstop.
And it needs to be fully insured.
Even if you manage to check those boxes, most of them won't bat an eye unless you've got years of reputation, robust capital controls, and extensive security and that's only as a backstop.
18/25
Most of these institutions won'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.
Most of these institutions won'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't be reclaimed) is tough and overwhelmingly expensive.
Places like Coinbase Prime (and Coinbase Custody) and BitGo are getting there.
But getting insurance to cover this asset class (which if stolen can'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't worth the risk.
Even if you check all the boxes, there is a good chance an insurance company just says no anyway, because realistically you aren'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't achieve. It's an accomplishment of a lot of human work and effort.
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't achieve. It'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'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.
(Sure, we can have on chain insurance, but lets not kid ourselves, pension funds don'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'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)
If even 0.1% of these invested assets shifted into crypto, then it'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't add the capacity unless they were already seeing demand from corporate treasuries and large institutions.
Insurance policies for corporate custodians may seem boring, but they are really important to the space.
More importantly, they wouldn'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're going to see a lot more institutions and companies disclosing big crypto purchases, as we continue to become a legitimate asset class.
As we come to the end of a filings season, I think we're going to see a lot more institutions and companies disclosing big crypto purchases, as we continue to become a legitimate asset class.
