The takeaway:

Cryptocurrency exchange Coinbase is in talks to set up its own regulated insurance company with the help of insurance broker giant Aon, industry sources told CoinDesk.

Establishing “captive” insurance subsidiaries, wholly owned by the firm being insured, is a time-honored way for corporations to reduce costs and improve access to reinsurance markets (a form of insurance purchased by insurance companies in order to mitigate risk). Nearly all Fortune 500 companies and thousands of midsize firms maintain captives, according to a December 2018 article in trade publication CPA Journal.

Coinbase and Aon see this structure as potentially part of the answer to the shortage of insurance available to crypto exchanges, the sources said. While Coinbase has obtained more coverage than most, often exchanges just self-insure by setting aside a bunch of coins to cover losses in the event of a hack or disappearance of customer funds. The problem with that approach is its lack of a formal structure, creating the temptation to access the funds for other purposes and ambiguity about how much coverage a firm actually has.

With a captive, on the other hand, the funds are segregated and held in a regulated, audited vehicle, which can help the firm go out and attain more cover from the reinsurance market. To be clear: the captive would insure only its parent company, not competitors.

Neither Aon nor Coinbase would comment on the latter’s interest in captive insurance. However, Aon did say that it established the industry’s first crypto captive earlier this year for an unnamed client. This Caymans Islands-based captive will write “crime” policies covering hacks of hot (online) wallets and “specie” coverage for cryptocurrency kept offline in cold storage, the broker said. 

The two companies have worked together before: in April, Aon helped arrange about $255 million in coverage for Coinbase’s hot wallets. The exchange, which keeps only 2% of client funds in hot wallets, held $25 billion of crypto at the height of the 2017 bullrun. 

Aon said a handful of its crypto clients are considering the captive option, adding that Bermuda and some leading U.S. on-shore domiciles are expected to follow the Caymans soon. 

“There is a lack of capacity and some are uncomfortable with what is available in the marketplace and are looking to alternative solutions,” said Jacqueline Quintal, a managing director and the financial institutions practice leader at Aon. “I think the path for most will be to buy some amount of traditional insurance first and then to explore alternative structures, potentially including a captive — and we are having more and more of these conversations.”

The case for captives

Stepping back, a captive is an insurance company created and completely owned by another company to provide coverage for itself. It’s a regulated alternative to self-insurance which can offer direct access to reinsurance markets and act as an investment vehicle.

If pricing is too high in the commercial insurance markets or no underwriters are willing to cover a firm’s risk, captives are used to formalize self-insurance with reporting on capital and reserve requirements. 

Speaking to the advantages of using a captive rather than simple self-insurance, Quintal said: “If a firm is self-insuring, they’ve accepted responsibility for funding 100% of any loss. Captives, in comparison, provide a means through which firms can access insurance or reinsurance, while also pre-funding self-insured loss amounts in a more formal way than simply setting aside capital.”

Taking this more formal and regulated approach, Quintal added, can help create more capacity in the market, and “by having more control over a firm’s insurance program, captives can bring the price of risk financing down over time.” 

Even for a crypto firm, a captive would have to keep most of its claims reserve in fiat, but crypto could potentially be used for the surplus (additional funds reserved in case of an unexpected amount of claims), according to Ward Ching, managing director, Aon Captive Insurance Managers. 

There have also been discussions about including crypto in the Caymans captive’s investment activities, said Ching. 

“It’s all about doing the math and showing the domicile regulatory leadership how the inclusion of cryptocurrency as an asset class both satisfies the regulatory mandate and provides financial flexibility in a constructive and safe manner,” he said.

Self-insurance

It’s no secret that many of the largest cryptocurrency exchanges simply self-insure against hacks and losses.

The problem historically has been that crypto insurance is prohibitively expensive, way too limited and fiendishly tricky when it comes to actually making a claim. In response, crypto firms have resigned themselves to holding their own coins in cold storage (where the private keys are disconnected from the internet, in a hardware device or piece of paper locked in a safe) to deal with losses.  

San Francisco-based exchange Kraken has been candid about having its own insurance fund. As Kraken CEO Jesse Powell told CoinDesk: 

“The balance sheet is basically also called the insurance fund.” 

Kraken has “well over $100 million” put aside, said Powell, much of it in bitcoin to save the company from having to go out and buy coins on the open market in the event clients’ coins need to be replaced. 

Similarly, in February 2018, Singapore-based Huobi put aside 20,000 bitcoin as its fallback protection mechanism in the event of a security breach, known as “the Huobi security reserve”. As a further measure, it has hoarded a “protection fund” by earmarking 20 percent of transaction fees per quarter to buy back its native tokens. 

“If you add our protection fund up with our reserve fund we are talking well over $400m of protection there,” Josh Goodbody, head of Europe and the Americas, Huobi global sales and institutional business told CoinDesk.

Powell, an outspoken critic of the state of insurance provision offered to crypto firms, said over the years his firm has been quoted insurance many times at prices which were “ridiculous and obscene.”

“There’s just not a good deal out there,” he said, “I’m sure you can get someone to write you a deal for like 10% a year of the balance and actually have real meaningful coverage. But I don’t think people are going to pay that.”

Goodbody, likewise, explained that Huobi had been around the block looking at insurance. Indeed, he questioned how coverage in the hundreds of millions of dollars touted by some firms would apply to hot wallets, which he said would be “extremely confusing and full of caveats and fine print.”

Considering alternatives

Exchanges tend to be loose in how they go about self-insuring, according to Powell.

“I think everybody basically has these funds on their balance sheet and they are investing them or dipping into them for operations,” he explained. “Nobody, as far as I know, has provided some sort of audit or an explicit statement about how these funds are segregated and kept in a different entity as if it were really like third party insurance provider.”

Nevertheless, Powell said he struggled to see what value it would add setting up a separate captive insurance company.

“I just feel like it’s moving money between pockets of the same entity, and I don’t really see how this actually helps the consumer have more protection. It’s all the same basket of money anyway,” said Powell. “I don’t know why this would be able to get a better deal than we could get directly with an insurance broker.” 

Huobi’s Goodbody was more optimistic, calling Aon’s plans “extremely interesting and super positive for the market.”

Some innovators in the insurance space, such as ethereum-based Nexus Mutual and also Etherisc (another partner of Aon), have suggested going further than setting up individual captive vehicles and rather pooling together groups of crypto disaster funds into a system of reinsurance.

Powell agreed this idea seemed to have more potential value for the industry, but he questioned the practicalities. 

“You could conceivably do a group insurance deal among the exchanges, like a co-operative kind of thing. But then you have to have your competitors audit everything and I think everybody’s too smart for that – and too paranoid,” he said. 

Aon’s Ching agreed there was some “obvious logic” in getting a group of crypto self-insurers together and aggregating. The problem, he said, is these companies are very different once you get under the covers:

“They have different risk tolerances, different capital structures and different security mechanisms. Until they harmonize that it’ll be hard to put a group captive together; not saying it’s impossible, just a bumpier ride.”

Coinbase CEO Brian Armstrong at Consensus 2019 image via CoinDesk archives

A new trading platform for security tokens has launched with backing from Singapore Exchange (SGX), the country’s public stock market, and technical support from ethereum startup ConsenSys.

The 1X platform has gone live Wednesday with its first listing of an ethereum token, purchasable with Singapore dollars. The token represents about 7 percent of the shares of a Singapore fund manager called Aggregate Asset Management (AAM).

AAM raised about $4 million in fiat currency in the six weeks since May 4, 2019. Investors in the round received the corresponding ethereum tokens to account for their ownership, which is now tradable on 1X.

The goal of 1X is to provide an IPO-like platform but for private companies to raise capital and to increase liquidity in the primary capital market by using a public blockchain to validate transactions.

“We take a portion of private companies – usually 10 to 30 percent – and put that into a special purpose vehicle (SPV) … to back every token we mint for listing and trading,” 1X’s CEO, Haiping Choo, told CoinDesk, adding:

“The overall idea is to bring liquidity to an otherwise historically illiquid assets. We are starting off with private companies. In the future, we intend to apply the same workflow to other illiquid assets like bonds or real estate, etc.”

Global availability

1X was set up by Capbridge, a Singapore-based exchange for primary market stock offerings. Regulated by the Monetary Authority of Singapore, the country’s de facto central bank, Capbridge holds a Capital Markets Services license. It also has a Recognized Market Operator (RMO) license for 1X.

SGX, meanwhile, is a strategic investor in 1X, meaning the stock exchange not only has an equity stake but is also involved in business operations.

Each token represents actual company securities, Choo said. “Currently it’s only ordinary/common shares, but we may extend to other share types e.g. preferred shares and other types of securities such as convertible bonds etc.”

By using the ethereum blockchain to replace the role of a traditional settler, the exchange aims to reduce operational costs and make it available for global participants, in addition to the 1,000 accredited investors on the platform.

While Singaporean traders must meet the threshold of at least $220,000 in annual income and $1.5 million in net worth to qualify as an accredited investor, Choo said there’s no minimum requirement for investors from outside jurisdictions as long as they pass the know-your-customer (KYC) process.

For 1X’s part, the exchange charges a 2.5 percent transaction fee for each trade and a $3,600 listing fee a year for successful applicants.

Consensys’ role

Consensys, the New York-based blockchain software studio started by ethereum co-founder Joseph Lubin, helped design a solution for 1X to issue what are called “modified ERC-20 tokens“ to satisfy interoperability needs and regulatory requirements.

Daren Frankel, director of ConsenSys’ Singapore operations, explained that this design would allow the transactions of the securities-backed ethereum tokens to be visible on the ethereum network like any other ERC-20 tokens.

However, “it does not give custody of the assets directly to users, as the trading of shares on 1X is subject to a number of compliance checks,” he added.

That’s because all of 1X’s listings – both the tokens and underlying securities – are required to be fully stored by a third-party custodian licensed and regulated by the Singapore government. Choo said it works with Equiom Trust Singapore and plans to add more custodians.

In essence, while 1X functions as a centralized exchange, it does not hold investors’ private keys, and for every trade inside the exchange, on-chain transactions are required to go through the third-party custodian.

“When we designed this, we designed it to be a fully compliant, scalable and standardized way to onboard global companies and investors,” Choo said, “because the assets we are offering are securities, which are the most highly regulated asset class.”

Haiping Choo image courtesy to 1X

The price of Tron dropped precipitously Monday on inaccurate rumors of a “police raid” at the company’s office in Beijing. The real story, however, was far more interesting.

According to an official company post, the police arrived to protect the office from “people [who] were deceived by the so-called ‘Wave Field Super Community,'” a group that used the “Chinese-language version of TRON’s name to defraud investors.” The victims called Tron itself a scam and cited the alleged suicide earlier this month of one investor in Wave Field Super Community.

“The victims had been promised high rates of return on their investments in the name of TRON, BitTorrent and uTorrent,” the company wrote.

The bilked investors also stormed the wrong place. According to Tron, they approached the office of Raybo Technologies, a Tron affiliate that seems to have filed a number of U.S. trademarks for various Tron-related phrases.

“TRON officials expressed their sympathy and understanding for those who had been deceived, however, the company strongly condemns acts of violence that may be perpetrated as a result of events that are not in its direct control,” the company wrote.

Tron CEO Justin Sun responded on Twitter:

The Wave Field Super Community has been running since January 2019 and banked on its name’s similarity to Tron’s use of the phrase “Wave Field” in China. The alleged Ponzi scheme promised massive returns and claimed to be investing in “Tron, BitTorrent, and uTorrent.”

The group pretended to be a Tron “Super Representative,” essentially an important node on the network, a claim that Tron never confirmed. The site closed suddenly on July 1, leading to mass confusion. Users of the Chinese microblogging site Weibo circulated what appeared to be a suicide note by a woman named Xia Bing, who claimed to have borrowed money to invest in the scheme. The note first appeared on a site called Nuclear Finance in China.

Even with the “raid” rumors debunked, Tron’s price has yet to fully recover.

Tron image via Shutterstock.

Facebook has said that current regulatory restrictions mean it won’t be launching its digital wallet service and cryptocurrency in India.

Speaking to local daily news source The Economic Times, a Facebook spokesperson said:

“There are no plans to offer Calibra in India. As you may know, there are local restrictions within India that made a launch of Calibra not possible at this time.”

The representative is likely referring to an order by the central bank, the Reserve Bank of India (RBI), which last April effectively banned banks from providing services to cryptocurrency-related firms such as exchanges. Several of India’s top exchanges have since closed, citing the RBI restriction as the reason for failing business.

The RBI order is being challenged in the supreme court, but the case seems to be in limbo pending some direction from government.

A high-level government panel is also said to be working on cryptocurrency legislation that could possibly ban the use of crypto outright, reportedly even handing down prison sentences to those breaking the rule. Earlier reports suggested crypto might ultimately be allowed in law, but under tough rules.

India is Facebook’s largest market and is currently seeing a pre-launch pilot of its WhatsApp subsidiary’s payment services across 1 million people, said today’s report.

However, the tough scenario in the nation regarding cryptocurrencies means Facebook’s Libra project will have to eye the market from outside for now.

“Calibra will respect the legislation,” London-based Facebook representative Alexandru Voica told The Economic Times, adding that the social media giant aims to work with local lawmakers to see if legislation can be amended.

While it’s early days for the project, the Libra Association is talking to potential “partners” across the globe, said Voica, hinting that there may be other use cases for Calibra in India.

He said

“The blockchain project has multiple uses in smart contracts, supply chain management and so on – it’s not just for cryptocurrencies.”

Facebook image via Shutterstock

The New York Attorney General’s Office (NYAG) has submitted new evidence in its aim to prove that crypto exchange Bitfinex and Tether had served New York customers longer than they claimed.

As part of the NYAG’s ongoing investigation into Bitfinex and Tether, the NYAG filed a Memorandum of Law in Opposition, an affirmation, as well as a total of 28 pieces of exhibits on July 8, with the New York Supreme Court.

The NYAG said in the new documents:

“Even a cursory examination of the facts gathered to date in the OAG’ s investigation shows that Respondents have extensive and consistent contacts to New York concerning the matters under investigation.”

The filings come with various exhibits to showcase Bitfinex’s and Tether’s interactions with New York residents over a period that was longer than the two previously claimed.

CoinDesk reported in May that Bitfinex and Tether argued with the judge in the New York Supreme Court that the case should be dismissed since they “have nothing to do with New York investors” and “the businesses do not allow New Yorkers on their platforms and do not advertise or otherwise do business here.”

However, the NYAG indicated that based on the series of evidence gathered and provided to the court, Bitfnex had customers log in to its platform as recently as Dec. 18, 2018.

Further, Exhibit (S) – H also showed the correspondence between Bitfnex and the billionaire hedge fund manager Michael Novogratz’s Galaxy Digital to onboard the latter as Bitfinex’s customer in October 2018.

In addition, the NYAG provided exhibits to show that Bitfinex held accounts with two New York banks – Signature Bank and Noble Bank – and at least “one other New York-based financial institution during the relevant time period, which they used to transfer money to and from clients of the Bitfinex and Tether platforms.”

The NYAG added:

“Respondents have repeatedly engaged New York firms to assist them in their business objectives, including to make statements to the markets about the operation of the Bitfinex trading platform and the cash backing of tethers; and as recently as 2019, Respondents opened a trading account with at least one New York-based virtual currency firm.”

In the Memorandum of Law in Opposition, the NYAG also took aim at Bitfinex’s recent issuance of the LEO exchange platform token.

“Respondents’ recent ‘initial exchange offering,’ for instance, has every indicia of a securities issuance subject to the Martin Act, and there is reason to believe that the issuance is related to the matters under investigation,” the NYAG said.

The NYAG first filed a complaint against Bitfinex and Tether in April 2019, alleging that Bitfinex had covered up the loss of more than $850 million by borrowing from Tether’s reserves.

Shortly after the NYAG filed the complaint, Bitfinex conducted an initial exchange offering for its own LEO token and one shareholder of the firm claimed it successfully raised $1 billion with commitment from private investors.

Read the full affirmation below:

NYAG AFFIRMATION by CoinDesk on Scribd

New York Attorney General Letitia James Image via Shutterstock

Creditors of Mt Gox waiting to get their bitcoin back from the long-defunct exchange can now get pennies on the dollar by selling their claims to Fortress Investment Group.

In a letter sent to creditors, Michael Hourigan, a managing director at the New York-based private equity firm, said he is purchasing these claims for a bitcoin investment vehicle the firm operates. 

Mt Gox collapsed in 2014 after some 850,000 bitcoins disappeared from the exchange’s servers. While the exchange entered bankruptcy at the time, its status switched to civil rehabilitation last year. 

Creditors of the exchange hoped that they would receive their missing bitcoin after the switch, rather than the cash equivalent at the time of the exchange’s collapse. The case is currently sitting before the Tokyo District Court.

Selling claims

Multiple copies of the Fortress letter were shared with CoinDesk, with one version published in full below. 

“Dear Creditor,” the letter begins. “I manage an investment vehicle which has been buying Mt. Gox creditor claims.” 

It goes on to add:

“We review each claim individually but are now generally able to offer $900 per BTC claim, or roughly 200% of the bankruptcy value (which was $451 per BTC claim). We can pay that in Bitcoin, or any fiat currency of your choice. Our payment would be made within 10 business days of the claim transfer confirmation.”

The $900 price is fair to both creditors and Fortress’ investors, Hourigan contends. (It represents about 7.5 percent of bitcoin’s Monday afternoon market price of $11,870.72, according to CoinDesk’s bitcoin price index.)

One creditor, who did not wish their identity to be made public, told CoinDesk that the letter also included their individual claim amount and a letter number. 

Former Mt Gox creditor advocate Andy Pag announced in April that he had sold his stake to a New York-based investment firm for $600 per bitcoin. He did not name the firm at the time and did not respond to a request for comment by press time Monday.

Long-term interest

Fortress has long been active in the crypto space and was reportedly looking to launch a bitcoin investment fund as far back as 2013 – before Mt Gox collapsed.

The New York-based firm bought $20 million in bitcoin that year, according to public filings.

Former Fortress CIO Michael Novogratz has continued to remain active in the space as well, most famously with his “crypto merchant bank,” Galaxy Digital.

Fortress was acquired by Japan-based SoftBank in late 2017, which itself has been active in the blockchain space (though less active with bitcoin projects specifically). However, Fortress remains in control of its day-to-day operations, according to the Financial Times.

Neither Hourigan nor a Fortress spokesperson immediately returned requests for comment.

Mt Gox image via CoinDesk archives