For this week’s episode will be shifting our focus from blockchain itself to one of blockchain’s most popular applications, cryptocurrencies. Specifically, we will be discussing the challenges and opportunities of brokering crypto assets.

To help us we have a panel of experts including Rachel Turk, Head of Directors and Officers insurance at Beazley, Rhys James, Head of Management Liability and Financial Institutions at Paragon Brokers and Ed Ventham, Client Executive at Paragon Brokers.

 

Blockchain in two minutes

A blockchain is a distributed ledger that is maintained by a network of users. It is powered by its users, who keep it secure through cryptographic algorithms. This is a distinguishing feature of blockchain that ensures the ledger is safe and trustworthy.

 

Cryptocurrencies

Cryptocurrencies are the tokens of value that exist on specific blockchains. The Bitcoin blockchain, for example, uses Bitcoin. The US Securities and Exchange Commission designated cryptocurrencies as a currency, saying they work as a “replacement for sovereign currencies”. This distinguishes them from a safe security and has great implications on how insurers perceive cryptocurrencies.

 

1. Mined vs premined

A mined cryptocurrency, such as Bitcoin or Ether, is what people generally understand cryptocurrencies to be. Multiple users on the network solve the complex algorithms that keep it secure and are rewarded with the currency.

A premined currency involves creating a number of coins before the currency is launched to the public. The currency is then distributed over time onto the blockchain for its specific use case. Premined cryptocurrencies have a negative connotation in the crypto community as some argue gathering all the coins upfront allows companies to easily manipulate the market.

 

2. ICOs: utility and security tokens

Initial Coin Offerings (ICOs) are used to raise capital and involve the distribution of utility or security tokens. Utility tokens represent future access to a company’s services and are not designed as investments. This created difficulties for companies and insurers alike. When insurers were discussing ICOs and SAFT agreements, what they were really trying to cover was the legal risk inherent in the agreement.

Rhys informs us that, in the last few months, there has been a shift towards security token offerings. A security token offering is essentially an equity or dividend offering, with security tokens having an inherent security designation by the SEC. From a risk point view that means clients are preparing private placement memorandums and adhering to SEC rules around security offerings. This changes the risk of the ICO race and moves the market forward, making a great difference to insurers who can now know they are dealing with well-established securities laws.

 

3. The crypto industry

When examining the crypto industry it is important to distinguish between its different sectors. These include pure blockchain companies,