Bitcoin exchanges in Hong Kong are facing considerable headaches complying with new regulations from the Securities and Futures Commission (SFC) that stipulates compulsory insurance coverage against cryptocurrency theft.
The SFC joins regulatory bodies in other jurisdictions in prescribing a detailed governance framework for their respective virtual currency market. However, the novel nature of the industry coupled with a few extenuating factors means that platforms face significant difficulties while trying to abide by these new laws.
SFC Insists of Robust Insurance Coverage Against Bitcoin Theft
Hong Kong’s financial regulatory watchdog wants local bitcoin exchanges to provide full coverage for customer funds. This law is part of a raft of new regulations expected to come from the SFC as the Commission looks to regularize Hong Kong’s cryptocurrency scene.
In a document published by the SFC, the regulatory body offered a general overview of the insurance framework that crypto exchanges ought to follow. An excerpt from the report reads:
The SFC generally expects that the insurance policy would provide full coverage for virtual assets held by a platform operator in hot storage and a substantial coverage for those held in cold storage (for instance, 95 percent).
As previously reported by Blockonomi, Hong Kong regulators have chosen a different governing path from their counterparts in Mainland China. Instead of banning cryptocurrency trading and ICOs, the SFC prefers to create a robust framework that allows cryptocurrency commerce to thrive.
Incessant Exchange Hacks Hikes Insurance Premiums
For bitcoin exchange, however, getting insurance coverage is proving to be an almighty headache. Insurers willing to underwrite policies that provide coverage for an industry like virtual currency trading aren’t common.
One of the biggest hurdles comes from the incessant cyberattacks suffered by bitcoin exchanges. Cryptocurrency theft skyrocketed to almost $2 billion in 2018, with exchange hacks contributing almost 50% of that total amount.
Insurance companies ready to provide coverage for crypto exchanges tend to charge high premium given the risks inherent in the business. In an interview with the South China Morning Post (SCMP), Murray Wood of Insurance giant Aon described the situation saying:
The number of insurers and reinsurers that are willing to underwrite cryptocurrency cybersecurity risk is extremely narrow. The amount of available coverage capacity today is under US$1 billion per transaction.
Another contributor to the pricing palaver for cryptocurrency exchange insurance comes from the multifaceted nature of the enterprise. Not all platforms are the same in terms of operations. Listed tokens, and compliance with regulatory provisions to mention a few.
Thus, there is yet no industry standard for the limit to which insurance companies can cover liabilities for bitcoin exchanges. For now, bitcoin exchange insurance exists in the realm of non-standard coverage.
As a result, insurance providers evaluate each cryptocurrency exchange to determine what kind of premium can be offered. This trend contributes greatly to the cost of procuring insurance coverage.
Cyberattacks Aren’t the Only Danger
Hacks aren’t the only means by which bitcoin exchanges can lose customer funds. Platform malfunctions and exit scams can also lead to the disappearance of funds in both fiat and cryptocurrencies.
The QuadrigaCX saga is a prime example of how traders can lose funds even though a cyberattack didn’t occur. Gerald Cotten, the founder of the exchange supposedly died in India in late 2018 without passing on the means to access the exchange’s cold wallet storage which reportedly holds more than $140 million in cryptocurrencies.
Despite this clear and present danger, most insurance companies will not offer coverage for anything outside of cyberattacks. In South Korea, platforms like Bithumb have adopted recommendations from regulators in the country which make them liable for all customer losses regardless of whether it happened by hacks, fraud, or accident.