FTX Bankruptcy Clearly Needs Insurance Obligation[Opinion]| coindesk JAPAN | Coindesk Japan

There is a routine debate about what new regulations are needed to prevent a second FTX. Clearly something is needed, but experience has shown that current regulators are not strong enough to prevent a recurrence.

For example, even if the U.S. Securities and Exchange Commission (SEC) had the necessary knowledge and ability to fully regulate Web3, its influence would remain within the United States. In the case of Bahamas-based FTX, its influence fell short by 240km.

Mandatory insurance makes the industry safer

As co-founders of the world’s first cryptocurrency and blockchain infrastructure insurance company, we seek insurance by regulators as a market-oriented means to prevent damage from cryptocurrency exchange bankruptcies and related catastrophic events. I would like to propose the compulsory

Just as automobile insurance has made cars safer, with fewer and less severe accidents, a rigorous underwriting process for insurance , a series of processes to determine whether or not to underwrite, and to decide underwriting conditions, insurance amount, and premium rate), the possibility of bankruptcy will be greatly reduced, and in the event of bankruptcy, can also mitigate the impact of

There is ample precedent for federal governments and regulators to encourage and mandate that companies providing critical infrastructure be insured. In particular, it can cover rapidly evolving risks that legislation cannot keep up with.

Discussing opportunities for the federal government and the private sector to work together to mitigate the threat of terrorism, then-Secretary of Homeland Security Michael Chertoff said:

“Sometimes it would be good to let the private sector find a more co-ordinated way to keep people moving in a consistent way. Sometimes we can use market-based incentives more aggressively. For example, we can partner with the insurance industry or try other ways to leverage market forces.”

While there are significant differences between cyber insurance and crypto insurance, the common element of network security makes cyber insurance a useful reference.

Regulators have gone to great lengths to encourage Internet companies to use cyber insurance. The benefits were detailed in a report entitled “Cyber-Insurance Metrics and Impact on Cyber-Security” during the Obama administration.

“Insurers look for a certain level of security as a prerequisite to warranties, and companies with better security practices often pay lower premiums. “The cost of inadequate security is felt, leading to increased and improved cybersecurity investments,” the report said.

Benefits of rigorous underwriting

A strict underwriting for a company the size of FTX would have required the presence of an independent and active board of directors as a condition of indemnification.

Further to the underwriting, the parties would also have reviewed the history of key management personnel, accounts and associated cryptocurrency wallet addresses to ensure sufficient identities and reserves. If so, FTX would have picked a better person for its chief compliance officer.

In addition, the underwriting will review the exchange’s policies to ensure that customer and company assets are completely segregated and that customer assets are not used for company debt service or trading. In the unlikely event of bankruptcy, the client’s assets should be returned without fail.

Indeed, FTX’s terms of service stated that user assets would be segregated, but it appears that this was not the case. Neither insurance nor regulation can prevent it if it is actively intended to deceive.

The libertarian ethos permeating Web3 provokes a strong response to the debate over government regulation. However, avoidable losses and failures, especially on the scale of FTX, would undermine the greater purpose of widespread adoption of blockchain technology, which has many benefits such as improved transparency, resilience, censorship resistance, and reduced friction in trading. give.

We believe that regulatory insurance mandates are necessary for the Web33 community to have confidence in current and future users, developers, participants, and regulators alike, and we believe that they are agile and acceptable to the community. We see it as a responsive, accurate, market-based solution.

Mr. Jared Gdanski,Mr. Raymond Zenkich: Co-founder and CEO and President, respectively, of crypto insurance company Evertas.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: Shutterstock
｜Original: FTX’s Failure Highlights Need for Federally Mandated Insurance, Not More Regulation