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Financial R&R: Crypto Currency - Securing Coverage for Potential Losses

By Alliant

Ron Borys and Glenn Morgan, Alliant Financial Institutions, discuss the rapidly changing insurance marketplace and some of the resulting hurdles faced by firms in the digital asset space looking to obtain coverage. Billions of dollars in cryptocurrency are stolen each year with very few insured losses. 

Introduction (00:00):
Welcome to Financial R&R, a show dedicated to financial insurance and risk management solutions and trends shaping the market today. Here are your hosts, Ron Borys and Ryan Farnsworth.

Ron Borys (00:14):
Welcome, and thank you everyone for joining us today. This is Ron Borys with Alliant Financial Institutions practice. On today's podcast, I'm joined by my cohost Glenn Morgan, who leads our crypto and digital assets practice and our special guest, Adam Zuckerman. Adam is an Associate in the FinTech Industry Group and Emerging Companies Practice at the global law firm, Latham & Watkins, where he focuses primarily on the block chain and cryptocurrency sector. Adam attended the University of Pennsylvania Law School during which he also worked on the legal team at Consensus, one of the most notable companies in the block chain space. Adam has published multiple papers on the emerging product of digital asset insurance or insurance for crypto assets. We are thrilled to have Adam join us today.

Glenn Morgan (01:05):
I think the best thing to do here would be to start with a little bit of background. Ron mentioned you came from Wharton's Law School and also spent some time at Consensus. I was wondering if you could talk a little bit about your time and Consensus.

Adam Zuckerman (01:22):
So, I'll clarify that it's University of Penn Law School. At the law school, we don't like to be associated with the Wharton rivalry, but yeah, really enjoyed my time at Penn Law. It's always nice to be able to work in the crypto industry; but to be able to approach it from more of an academic mindset and just to dig into it from the research side of things was really fascinating and led me to write this paper we're going to talk about. And then, yeah, Consensus. I worked there in between my first and second year of law school. And I continued working there for about six to nine months after that. And it's just a fascinating place to work. The structure of the organization itself is fascinating just because they have a flat structure, but just being around some of the best and brightest in the industry, it was really amazing.

Glenn Morgan (02:13):
I can imagine. I'm just curious, what was your scope and focus when you were at Consensus?

Adam Zuckerman (02:20):
So, I supported the legal team and the legal team at the time I was there, supported basically all of the bespoke companies. So that was a lot of helping draft bespoke contracts and generally just be the legal eyes and ears to support all of the smaller spoke companies.

Glenn Morgan (02:42):
So, I guess a little bit of a segue here into how we connected. I’m always looking around for more content as it revolves around crypto and insurance. And as you've experienced, there's not a lot of stuff out there that overlays these two sectors. So, I was looking around the internet; I found your paper, Ensuring Crypto the Birth of Digital Assets, which obviously piqued my interest and led me to reach out after reading it. But I was wondering if you could tell us a little bit about the inspiration there and what led you to venture into our space?

Adam Zuckerman (03:19):
Yeah, so the backstory is I took a class with Professor Tom Baker at Penn Law who is kind of an insurance guru, and he also taught a class on FinTech. So he had a little bit of crypto background and like I talked about a little bit, I think insurance doesn't always get the reputation of being the sexiest topic, but when you approach it from an academic standpoint, it's actually really fascinating to learn about how insurance really impacts society and helps in a way govern society. And my interest in crypto that led me to think, well, how is that? How's that going to play out in crypto? And so, I ended up working with Professor Baker and just dug into what was going on in the industry with crypto and really just try to figure out really what was happening.

Glenn Morgan (04:14):
That's really interesting. And so, when you first set out on this topic and started your research, what was your overall reaction to the environment? And maybe you could talk about a little bit of your expectations and then some of those quick realizations that we've talked a little about.

Adam Zuckerman (04:33):
My first realizations were, wow, this is a multi-hundred-million-dollar premium market, and I cannot find any sort of credible content, which is pretty crazy. I originally had goals of digging really deep into some niche aspect of the industry. And, and the more I dug, the more I was like, what I think I really need to do is just learn about what's going on and keep it high level for this paper; and how I went about that was read everything I could that was out there, but also just network in the industry and try to talk to as many insurers, exchanges lawyers - anyone I could really talk to who had any exposure to this space who gave me the time I reached out to and was just from that able to glean some general themes. And my takeaways, there were the industry is growing unbelievably quickly, but there's not a lot of people focused on it for most people. I think it's still a side job or a passion project that they're turning into a real job. And I know that's kind of the case with you and starting to make that shift.

Glenn Morgan (05:48):
Yeah. You hit the nail on the head in terms of credible content. You have folks out here like myself who can view Wharton and Penn Law to make way around the industry, but you'll have to forgive me; I'm a UGA grad. So we always like to compare ourselves and the risk and insurance world to Wharton, but certainly echoing that sentiment here. It's been a passion project of mine for a long time. And my experience is just extremely hard time gaining traction because there's such a conflict between the clients and insureds in the insurance marketplace in that the needs that clients have are in a lot of sense, too pricey and too risky for insurers to take on. And so that's constantly what we run into is where somebody is finally willing to write a policy for what these companies are asking for; but at the early stage of a startup FinTech crypto company, they're not able to dedicate that much of the balance sheet to what these insurers need to take on the risk. Maybe you could talk a little bit more about some of the significant findings you had as you got a little bit farther into the weeds. I know you talked about some of the things you mentioned were the insurance contract structure and maybe what your thoughts are on that.

Adam Zuckerman (07:13):
Yeah. So, one thing that’s really interesting to learn is the insurance that's out there right now is largely going to institutions. And those are mostly institutional custody providers for crypto assets or crypto exchanges. And then essentially those providers are getting insurance on the assets that they hold for their customers. So, there's sort of an extra step in the insurance and that the insurance is being provided for assets for the consumer, but the policy is actually held by the institution. And this creates an interesting dynamic where the individual’s assets are being insured or covered by the policy; doesn't actually have any clarity on what's in the policy. This is one thing that I thought was really interesting, but also a little problematic in that there's a lack of transparency for the consumer and creates a little bit of a perverse incentive for these institutions to get policies.

And like you mentioned, these policies right now for a variety of reasons are really expensive. So they have an incentive to carve out lots of things in the policies and generally kind of weak in the policy, but the consumer has no ability to actually understand what's in their policy. So the consumer has no way to differentiate between a really strong policy and a really weak policy. And all they can really go off of is the reputation of the institution. So I think that's something that is definitely going to have to get worked out. And I think some way the policies are going to have to be kicked down the ladder so that the consumer has more direction into what's in their policies.

Ron Borys (08:58):
Adam, you hit the nail on the head earlier when you made the comment about just the importance of insurance to the ecosystem of the world. Right? A lot of times I tell people, there wouldn't be planes in the sky, the stock market wouldn't open every day if there wasn't for insurance, right. Insurance is a critical tool. And I agree, I think in order for crypto and digital assets to continue down this path, which I think many of us believe it’s here forever, insurance is going to be a critical component of that. In your opinion, what do you think firms can do to help insurance companies understand the risks associated with digital assets and cryptocurrency? Because I think that's one of the biggest challenges that we face right now.

Adam Zuckerman (09:37):
Yeah, I totally agree. I think the biggest thing and this I think largely will happen naturally is education. I just think there's so much, misinformation is maybe not the right word, but just misguided beliefs about the industry. I mean, even just the conflation between Bitcoin and other digital assets right now, a hot topic is the environmental use of Bitcoin. And I think 90% of the people in the industry would think, oh, that applies to all of digital assets. And that just couldn't be further from the truth. So, I think that mentality cuts across the industry. As people begin to learn more and as it begins to become more mainstream, and when you have more people like Glenn focusing full-time on the industry, I think the bias around that the dangers are going to decrease, and I think insurers will be able to play a really big role in helping the industry become more mainstream.

Glenn Morgan (10:38):
Yeah, definitely. A lot of folks on our end too, are falling victim to all the fun floating around in the marketplace. I couldn't agree more in terms of getting people educated and that's part of the genesis of this podcast and what we're looking to do out there, but so the role of education, that's a huge part here. One of the other things that I wanted to hear your thoughts on is one of the conclusions you drew, which was fascinating in terms of how insurance could possibly be a de facto regulator where regulatory bodies haven't stepped in. So maybe you could walk us through that conclusion a little bit and what you think the whole industry could look like, should some of that take hold.

Adam Zuckerman (11:25):
This is probably what Ron was getting at. So I talked a little bit about in the paper that the first fire department ever was founded or created or inspired by insurers. And that was basically a loss prevention mechanism for insurers to stop having to pay out fire claims. And I think there's something similar that could happen in the crypto industry around security. And what I mean by that is essentially that I think insurers could play a really important role being a defacto regulator by creating common standards around crypto asset security. My theory or idea was that if insurers were able to somehow coalesce around some common standard that consumers or institutions who are looking to hold crypto assets would essentially require insurance because that's what their consumers and users demand. And if the insurers are creating these standards, that would be the rising tide lifts all boats from a security standpoint. So there's a lot to unpack there and there's a lot of logistics that would have to go into that. But I think in an industry that's moving so quickly where regulation is sort of lacking, but also really, really tough, it's a good alternative to have this private regulatory force instead of relying on regulators or the government to come in with security standards.

Ron Borys (12:56):
I think that's going to be a big key, right? I mean, I think early on when we first started going out and trying to place insurance for these types of firms, there was a lot of fraud that was being uncovered, which had underwriters really, really concerned. I think the lack of regulation and oversight also has insurers concerned because there's a lot of volatility in this product. I mean, if you look Bitcoin alone, right, and where it was 30 to 45 days ago, versus where it is today, there was a lot of people who were putting money into these types of things now with the Coinbase and some of these other platforms being pretty readily accessible to the common person. There's a lot of people that are trying to buy into the hype right now. And I think quite frankly, that's going to be a big hurdle that we need to clear in order to get these underwriters comfortable with the fact that this industry isn't going to be ripe with litigations for the foreseeable future

Glenn Morgan (13:45):
I think in terms of you stepping in and being a regulator that kind of paves the way for regulators to follow suit of what insurers are doing. Once they impose those standards and they're incepted and around the industry for a while, it also just benefits the regulators to be able to copy paste and say, hey, this is actually working. We've created a network here and this is something we can build on. So I thought the paper was fascinating. There's a lot more than I'd like to talk to you about for anyone listening, definitely go check it out. It's called Ensuring Crypto the Birth of Digital Asset Insurance. And you can pull that down from the web or we'll post it up in the show notes. But before we wrap things up here and a couple more things I wanted to get to, I wanted to get your thoughts on what you feel like is next. I know you finished this paper in December or something like that. And so, a lot has happened since then. I'm interested in getting your thoughts on what's next in insurance, and some other avenues maybe that could take hold potentially in DeFi.

Adam Zuckerman (14:56):
Funny story behind that is when I was writing the abstract in December, I mentioned the price of Bitcoin in the first sentence and I updated it over three days and actually had to keep going in like every two hours to change the price because it was just skyrocketing. So yeah, I mean it's five minutes in crypto. Yeah, I totally agree. So next steps. Yeah, I wrote this in 2019 through 2020, and DeFi was sort of just starting to become a thing. And one thing I didn't write about that I think is really fascinating is the concept of trying to insure in DeFi.

So without getting too technical here, that the typical insurance that I talk about and that I think is this sort of traditional crypto asset insurance, if you can call it that, is insurance for assets that are sort of custody by an institution or by an individual. And a big difference in DeFi is that it allows assets to essentially be locked up in a smart contract. So no one really holds the asset or no one really has control over the asset. It's locked up in base of code. So, trying to ensure that is a really fascinating and challenging problem. And there are some startups trying to do that, probably the most notable is a company called Nexus Mutual that actually essentially underwrites the code itself. But I mean, I think this is where the industry is heading, is allowing assets to be stored in the code, but that presents real risk problem if there's vulnerabilities in the code.
So I'm really curious about how the industry is going to solve this, because I think maybe more than ever insurance is necessary because people are not going to want to store their assets in a piece of code. They don't feel like they have some security around it.

Glenn Morgan (16:50):
No, absolutely. Well, hopefully that'll take a little bit more time. So, DeFi doesn't throw out our jobs, but yeah, definitely fascinating to think about doing some research there. One more quick thing before we go, I just wanted to hear from you on, what you're currently doing at Latham and how that folds into this industry. And what's on the horizon now for you?

Adam Zuckerman (17:15):
I've recently started at Latham about a year ago. I've been able to turn almost exclusively to the crypto and block chain industry for work, which is amazing. Our crypto block chain practice is growing extremely quickly. We're working with some really incredible companies, some of the bigger names in the space, some of the top VCs in the space, some of the protocols, bigger protocols. So, there's just a ton of work out there, and it's really exciting. I mean, just to be sort of a new lawyer getting to work very much on the forefront of this field is really fascinating. And like we've said that it's just developing so quickly. So it's really, really exciting to be a part of.

Ron Borys (18:00):
I wanted to thank you both. I think this is a really timely and relevant subject and hope to have the opportunity, Adam, to have you join us again down the road and as Glenn continues to lead the charge here and really try to drive change in the insurance market. Because, like I said, the key to sustainability is to be able to find partners in the insurance world to help hedge against some of these risks associated with business. And I think it's going to be critical to the crypto space with that. We will wrap things up for today. Thanks for listening in everyone. And we appreciate your time and thank you, Adam Zuckerman, for joining us. Keep an eye out for our next episode, and for more information, visit or feel free to reach out to any one of us directly via the contact information in the show notes. Thanks again, everyone. And talk to you soon.


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