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• A bitcoin ETF has yet to be approved in the U.S.
• But for some investors, Coinbase stock can serve as a stand-in by providing structured, indirect exposure to bitcoin.

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The House of Representatives has passed a bill that aims to get the SEC and CFTC working together on digital asset rules.

The Eliminate Barriers to Innovation Act of 2021 passed the House on April 20. Ranking Member Patrick McHenry (R-NC) first introduced the bill to the Financial Services Committee in March. Stephen Lynch (D-MA), one of the leaders of the FSC’s Fintech Task Force, cosponsored. 

The Eliminate Barriers to Innovation Act is, at this point, one of the first bills explicitly addressing digital assets to have left the committee stage and passed one of Congress’ two chambers. Its central focus is the relationship between the Securities and Exchange Commission and the Commodity Futures Trading Commission.

If passed, the law would mandate the creation of a joint working group of non-government employees who would, in turn, advise both commissions and ultimately come up with a report and recommendations as to how the two should address digital assets markets. In its current form, the bill cautions that that working group’s findings “may only relate to the laws, regulations, and related matters that are under the primary jurisdiction of the Securities and Exchange Commission or the Commodity Futures Trading Commission.”

The SEC and CFTC have struggled to parse which cryptocurrencies to define as securities and which to define as commodities for years. The issue is at the heart of high-profile cases like the SEC’s prosecution of Ripple over the issuance of XRP, which the firm claims to be a commodity and therefore outside of the SEC’s purview. 

A member of Representative McHenry’s staff did not respond to The Block’s request for comment by press time. 

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The U.S. General Services Administration (GSA) plans to auction off 9.45 BTC this Friday in what will be its third crypto auction this year, according to an announcement. At current prices, that’s worth around $530,000. 

GSA is the government agency responsible for managing government buildings and property. Through a platform called GSA Auctions, it sells off vehicles, equipment, computers, furniture, and other property from the federal government.

On March 15, the agency launched its first-ever bitcoin auction. Two days later, after 31 bidders made a total of 204 total bids, it sold 0.7501 bitcoin for a $9,000 above market value premium. The agency held a second bitcoin auction on March 29, selling 6.79 bitcoin worth $384,000 at the time. Combined, the two prior auctions raised $450,567, according to the GSA.

“Cryptocurrency is certainly some of the most unique items to ever come up for public sale on our GSA Auctions platform, but the excitement from our bidders is undeniable,” said Thomas Meiron, Regional Commissioner for GSA’s Federal Acquisition Service, in a press statement. 

The GSA has declined to reveal how it obtained the cryptocurrency, citing privacy concerns.

This upcoming auction for 9.45 BTC will occur on April 23 at 5 p.m. Eastern and will close on April 26 at 5 p.m. Eastern. Bidders must register on the GSA Auctions platform before participating in the auction and have a digital wallet in order to receive the bitcoin should they win the auction.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Coinbase is taking a new approach to innovation, according to an announcement from its chief product officer Surojit Chatterjee. In a Medium post published today, Chatterjee said the exchange would dedicate 10% of its resources to supporting “disruptive innovation bets.”

The plan is titled “Project 10 Percent” and refers to Coinbase’s work philosophy, according to Chatterjee. “The ’10 Percent’ refers to the amount of resources we’re dedicating to supporting these big bets in line with our philosophy that 70% of our time should be focused on core work, 20% on strategic bets, and 10% on innovative experimentation.”

Coinbase is aiming for projects that create “step-function change” in users, metrics or capabilities of the platform.

Some of the bets will fail, Chatterjee wrote. “If they all succeed, we weren’t thinking big enough,” said Chatterjee. “But the ones that do succeed should have a 10x impact and fundamentally move the crypto industry forward.”

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Enterprise blockchain firm Digital Asset Holdings has raised $120 million in a Series D funding round.

Investment firms 7Ridge and Eldridge backed the round. Carsten Kengeter and Veronica Augustsson of 7Ridge have also joined Digital Asset’s board.

With fresh capital at hand, Digital Asset is aiming to expand its team by 50% this year and introduce a new interoperability protocol.

The firm’s core product, the open-source DAML smart contract language, works on both blockchains and centralized databases for synchronizing data. Its clients include the Australian Securities Exchange (ASX), BNP Paribas, and Hong Kong Exchanges and Clearing, among others.

“Without DAML, workflows cannot be shared privately and securely within and across organizations, leading to inconsistent data, expensive to adapt architectures, and a lack of common interfaces,” said Digital Asset co-founder and CEO Yuval Rooz in a statement.

Last year, Digital Asset tripled its customer base, with 50% of new business coming from non-blockchain deployments, according to the firm’s CFO and COO Emnet Rios. “We saw significant demand for DAML to solve internal challenges of data silos within an organization,” she said. “As a result, we expanded our product portfolio to support 10 different underlying ledgers, including traditional databases.”

Besides DAML, Digital Asset is best known for working on ASX’s blockchain transition project for clearing and settlement. The project started in 2016, and the go-live date has been delayed several times. The ASX now targets a 2023 launch. Rooz told Bloomberg that the exchange could start industrywide testing by this year’s end.

The Series D brings Digital Asset’s total funding to $142.2 million, according to Crunchbase. Its Series C, which closed last year, raised $45 million.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

RIT Capital Partners, a British investment trust managed by J. Rothschild Capital Management Limited, has acquired a stake in the cryptocurrency exchange Kraken.

Investors in the trust were told about the stake during a webinar hosted by Numis Securities in late March, according to a note published by the London-based broker and corporate adviser on April 12. 

Ewan Lovett-Turner, a director at Numis, told The Block the note referred to “a secondary market purchase at what [RIT Capital] thought was attractive value.”

Both Kraken and RIT Capital declined to comment.

It is not clear how large the investment is, nor at what valuation shares in the startup changed hands or when the deal took place. Kraken was said to be seeking funding at a valuation of $10 billion or more according to a Bloomberg published in February.

RIT Capital was founded in 1961 and currently has a market capitalization of £3.8 billion. The trust is managed by J. Rothschild Capital Management Limited (JRCM) and was chaired by Jacob Rothschild until he stepped down as chairman and director in 2019.

The trust appears to have developed a taste for fintech. RIT Capital participated in a $142 million raise by crypto firm Paxos last year. According to its latest financial results, covering the year ended December 31, 2020, it has also invested sums of £7.8 million and £7.6 million in fintech firms NerdWallet and Brex, respectively. 

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Digital asset custodian BitGo announced Wednesday that it has secured a total of $700 million in insurance coverage for the assets in custody in cold storage. This is an important milestone in the continued mainstream adoption of bitcoin and other digital assets.  

That top-line figure represents an addition of $600 million in capacity to the $100 million it debuted in early 2019. 

To understand the significance of this development, a little bit of historical context is helpful, as well as a discussion on some of the nuts and bolts of the insurance program and how it will work for BitGo customers.

How insurance works and where it came from

Let’s start with a very broad question: what, exactly, is insurance? 

At its most basic, insurance is a financial instrument — a way to finance the cost of future risk. It’s pretty simple. On the one hand, you can self-insure risk, holding onto it yourself and bearing the full cost of a loss (unless you have transferred it contractually in an indemnity agreement with a counterparty). Or you can pay an insurance company a premium to take some or all of that risk from you. 

Insurance companies make their money by choosing risks carefully and then generating earnings in a tax-advantaged way on investments of pooled premium dollars. I am over-simplifying here, yes, but this is the fundamental model.

There’s nothing new about this. Insurance in one form or another has been around for a very long time, predating Satoshi’s bitcoin whitepaper by about 4,000 years. Indeed, the first insurance-like contracts in recorded history were in the form of marine loans used by Phoenician traders. The Greeks, and the Romans later on, learned about this proto-insurance, and examples of Roman marine loans can be found in the writings of Demosthenes.[1]

Maritime traders from what is now Italy are usually credited with creating the first true insurance policies in the 14th century, whereby risk is laid off to a third party whose business is principally in underwriting risks and making money from pooled premium dollars.   

Insurance for shipping makes a lot of sense. It protects not only the boat’s owner(s) but also the people with an interest in the cargo. By spreading the risk of loss over a group, one can protect against the risk of loss by paying a percentage of the value of the total property at risk, and benefit from economies of scale when others do the same.

That maritime insurance model was taken up by Lloyds in the 17th century, and its underwriters were instrumental in insuring maritime traffic and American trade in the 17th and 18th centuries — underwriting both commodity goods like sugar, coffee, and tobacco as well as having a now well-acknowledged role in providing insurance for the slave trade.  

Insurance made building skyscrapers and interstates possible and most modern commerce would grind to a halt, at least temporarily, if insurance was no longer available. Indeed, after 9/11, questions about the availability to cover property in the event of a terror event could easily have led to technical defaults of a significant chunk of the real estate loans for property in large cities if insurance requirements could not be met. In response to these concerns, Congress passed the Terrorism Risk Insurance Act, which created a federal backstop for terror risk (a similar law, socializing nuclear risk, predated this by 40+ years, in the form of the Price Anderson Act). 

Like any financial instrument, insurance can be used for good or evil, as in the case of the slave trade. In short, a credible argument can be made that modern industrial capitalism — for good and for bad — would not have been possible without the ability to pool and share risk through the use of insurance policies as a core financing model.

Insurance underwriters are also, by nature, conservative. Their job, after all, is to make sure that they recognize the right risks and calculate the likelihood that a bucket of those risks will result in claims and payments. And in the United States, at least, it is a very heavily regulated and scrutinized industry, subject to oversight by insurance commissioners in every state and territory.

It’s one thing to underwrite life insurance policies, given that you know for a fact that everyone eventually dies and where actuarial tables can guide you. The same goes for fire insurance policies, where 150 years of underwriting information is available, or auto, workers compensation and other goods and services for which significant underwriting data is available.

It becomes much harder to insure newer risks often tied to new technology, products and business sectors. Examples like drones, biometric data loss, cryptocurrency theft pose novel challenges because you don’t have actuarial or other loss history on which to price premiums. That, and/or there a full understanding of the technology is lacking.

BitGo’s insurance program and how it works

All of which leads us back to cryptocurrency, insurance for cryptocurrency risks, and why the news of BitGo’s $700 million dollars in cryptocurrency coverage capacity is a big, big deal.

You may think that the words bitcoin or cryptocurrency and “mainstream” don’t fit together. However, I have long held the view that bitcoin (and other digital assets) won’t be mainstream until insurance is readily available to holders. It’s also a necessity for certain types of regulated intermediaries and businesses that might wish to work with crypto but are mindful of their legal obligations. The news from BitGo represents a step toward bitcoin going mainstream and evidence of further acceptance by the naturally conservative insurance industry.

A brief note on BitGo, if you’re not familiar with it. The company describes itself as an “[i]nstutional digital asset custody, trading and finance platform.” It provides hot, warm and cold wallet custody for institutional clients with substantial digital assets. BitGo has also received a New York Trust Charter and a South Dakota Trust Charter, has been in the institutional space for digital assets since 2013.

As noted above, BitGo was one of the first companies to secure insurance coverage for digital assets, which required working with underwriters to educate them about the risks. Because cryptocurrency assets like bitcoin are bearer instruments, loss or theft of them at any point in the transfer or custody presents a significant risk. 

While this risk can be handled by and through a variety of security measures, using insurance as a hedge against loss provides an additional and significant layer of protection where available and can be attractive to institutional clients for a variety of reasons.

Until recently, the challenge in securing substantial insurance coverage was due to limited market capacity, combined with a lack of understanding of the risks by insurance company underwriters. The reality is that well-designed cold storage solutions do not require a leap of faith by an underwriter, but rather an education and confidence in technical measures used to provide security.

I spoke with BitGo chief revenue officer Pete Najarian about this new offering, which is being underwritten by Lloyds and certain European markets, along with the company’s broker Jacob Decker at the Woodruff Sawyer insurance brokerage firm.

Najarian correctly noted that cryptocurrencies were “considered uninsurable assets for quite some time”, which is why it is particularly newsworthy that BitGo is now offering this $700 million insurance tower for digital assets held in custody. 

Of this, $100 million is solely in BitGo’s name, and available to all customers. $600 million in excess of that coverage is available to customers on a “loss payee” basis and tied to dedicated customer limits. The coverage is only available for cold storage, but “anything in cold storage is contemplated by the program” according to Decker.

The coverage is provided using what is known as a “specie” coverage form. This is a type of “first party” insurance coverage, which is a shorthand way of saying insurance for property you own or that is in your care, custody and control. (An aside: third-party policies — general liability, directors officers, etc. — cover the risk of claims/suits by third parties against the insured. This is not third-party coverage).

Specie coverage has traditionally been used for valuable items such as precious metals, securities, cash and/or things typically held in a bank vault. Jewelers and armored car service companies sometimes also have coverage using this type of form. It has been adopted to the digital asset industry, and when you hear someone talking about cold storage coverage they are almost certainly talking about a specie policy form.

A loss payee is not an insured on the policy but is entitled to payment in the event of a loss for which the insured makes a claim. The loss payee coverage is specific to the customer’s own wallet. Using a perhaps more common example, if you have a mortgage or a car loan, your lender is most likely a loss payee on your homeowners or auto policy.

The reason for the loss payee status, as opposed to having insured status, according to Najarian, is that BitGo is the only party with enough information and knowledge to prepare a “proof of loss” document (which describes to the insurance company what happened and why there is insurance). However, in the event that a “proof of loss” is submitted and payment issued, Najarian says that payment would be made directly to the customer.

I also asked why the additional $600 million in limits might matter to a customer. Najarian explained that this is “attractive for institutional customers” because their own wallet is covered, in the event that the underlying $100 million in coverage for all customers was eroded by payment of claims. It also reflects the fact that it can be challenging for an institutional client to procure direct coverage for losses when their assets are no longer in their control but have been transferred to BitGo. 

It would be really easy (for me, at least) to get lost in the weeds here and talk about coverage details. I also have not seen the actual policy forms, where the devil is truly in the details.

To me, the story is this: when very conservative insurance underwriters are willing to write this much insurance for digital asset risks, cryptocurrency has gone mainstream. It also makes it much easier for regulated institutions, like trust companies, to hold digital assets for their customers and comply with applicable regulatory and fiduciary obligations. These are necessary rails to make digital assets like bitcoin usable on both Wall Street and Main Street.

Interestingly, while $700 million is a milestone and seems like a lot in terms of volume and assets at risk, this is nowhere near the amount of capacity that would be taken up if available. Such a figure really is a drop in the bucket in a $1 trillion-plus market. 

But it’s also one more sign that bitcoin and other digital assets are here to stay.

[1] See “The Earliest Insurance Contract: A New Discovery”, by Humbert Nelli, The Journal of Risk and Insurance Vol. 39, No. 2 (Jun., 1972), pp. 215-220 (6 pages)

About the Author:  Stephen Palley is partner in the Washington, D.C. of Anderson Kill, where he founded and chairs the firm’s virtual currency practice.  He is also a member of the firm’s nationally recognized insurance recovery practice.  The views expressed herein are his alone, and may not reflect the views of his law partners, or past, present and future clients.  His opinions may change.  He contains multitudes. 

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Quick Take

• This research piece contains simple to understand overviews of technical concepts, as well as explanations to recent hot button discussion topics in crypto.
• Topics include flashbots, arguments for different types of rollups, reasons for multi-chain deployments, flaws with algorithmic stablecoins, AMM design philosophies, etc.

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Huobi Asset Management, a subsidiary of publicly traded Huobi Technology, has launched passive bitcoin and ether funds for institutional investors.

Huobi Technology is an affiliate of crypto exchange operator Huobi Group via common ownership, but the two entities operate independently. The bitcoin and ether funds are tracker or passive funds, meaning they are designed to mirror the performance of the two cryptocurrencies.

The launch comes over a month after Huobi Asset Management first revealed the funds and regulatory approvals from Hong Kong’s Securities and Futures Commission.

Besides the two passive funds, the firm has also launched an active multi-strategy fund that would invest in a basket of cryptocurrencies and a private equity fund that would invest in crypto mining-related businesses.

The four funds are open only for professional or accredited investors such as high net-worth individuals, family offices, asset managers, and corporates.

Huobi Asset Management said it has already received $50 million in commitments across the four funds and targets $100 million by Q3 2021.

Hong Kong-based Arrano Capital also offers a passive bitcoin fund since April 2020. Arrano is a unit of regulated asset manager Venture Smart Asia.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

German telecommunications company Deutsche Telekom has invested in the public blockchain network Celo, the firm announced Tuesday. 

Deutsche Telekom purchased an undisclosed amount of CELO tokens and plans to stake them. Through doing so, the company’s subsidiary T-Systems MMS will operate as a validator using the Open Telekom Cloud (OTC), a scalable cloud infrastructure system the company developed.

According to the announcement, the OTC meets the security and compliance requirements of European regulations to ensure all financial services are secure and properly regulated. 

“Our investment in CELO, combined with infrastructure operated by T-Systems, allows our company to take a strategic approach to participating in a public blockchain network. We are able to secure the Celo network with our investment and our own cloud infrastructure while facilitating user onboarding and use-case development on top of the Celo network,” said Adel Al-Sale, Deutsche Telekom board member and CEO of T-Systems. 

Celo is an open-source global payments platform that allows users to make payments with a mobile phone. 

In addition to being a validator on the network, Deutsche Telekom will allow validators to send verification text messages using its SMS API. 

“Increasing the diversity of SMS providers on the Celo platform improves both the security and reliability of the decentralized phone verification protocol, which plays a central part in making the Celo blockchain easy to use,” the announcement stated. 

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.