Insurance coverage for custodied digital funds has kept many institutional investors on the sidelines of the digital markets, but a Montreal-headquartered startup aims to change that.
Typical digital custodians tend to insure a fraction of their holdings and bet that all of the assets could disappear at once, according to Alex Daskalov, co-founder and CEO of KNØX.
"While institutional investors appreciate the potential upside, but thefts have been rampant in the market with incidents of large amounts of cryptocurrency being stolen from third-party service providers," he told IntelAlley. "If they could get the up-side while capping their down-side risks, it would entice them to enter the market."
The challenge for most custodians is to ensure the funds they hold against loss, external theft, and, most importantly, internal theft.
"I've seen little information on other insurance policies," said Daskalov. "When I see low information, I expect that the risk has not been appropriately transferred."
It took substantial investments into KNØX's proprietary hardware, software, and ceremonial processes to produce the custodian's internal collusion-resistant environment.
Once developed, however, the next step was to convince the insurance market to accept that the infrastructure did what the custodian claimed it did.
The process involved multiple assessments conducted by third-party firms to audit and ensure that the properties of individual systems that they constructed to show those properties were real, according to Daskalov.
KNØXeventually struck a relationship with insurance broker Marsh to provide a policy that would cover 100% of custodied assets against loss and theft for institutions and fiduciaries.
"I've been waiting years and years to see these types of insurance policies and seeing that no one else on Earth was doing it. It was our turn to step in and produce a service that is insured to the level to which it should be insured to open this market to institutional capital," he said.
