Account Manager - Digital Assets
Last week the Superscript Digital Asset team attended the CryptoCompare Digital Asset Summit in London, the first event of its kind in the UK capital. Firstly, kudos to James Harris and team for putting on such an excellent event. We were lucky enough to meet some fantastic people and businesses over the course of the day and hope to catch up with many of them again in the near future. For anyone wanting to get in touch with the team go to our website or get in touch with Dan Ross, Stuart Griffin, Ben Davis or me, George Frith.
Here are some reflections on the event and the common themes we saw across the day:
Regulation, Regulation, Regulation
At any industry event you are almost guaranteed to hear certain buzzwords throughout the day. If one had been inclined to start a game of word bingo or (God forbid) drink a shot for every time certain keywords were mentioned, trust me, you’d have been legless before lunch! Regulation and education were the two buzzwords of the day, often appearing in tandem, when referencing how regulators need to educate themselves on our industry before they can effectively regulate without harming innovation. Congratulations should be extended to the panel hosted by Eva Szaley of the Financial Times who banned the use of the word ‘education’ and, from memory, the panelists managed to avoid the word for the entirety of their session, which was no mean feat!
My takeaway from the conversations is that we need to come together as an industry, engage with the regulators and collaborate with them to create a framework that achieves both parties’ goals:
- Protecting investors
- Complying with KYC & AML requirements
- Continuing to facilitate innovation
- Protecting financial markets
- Promote fair and transparent competition
Ultimately, the most exciting innovation occurs ‘on the margin’, where entrepreneurs are willing to push the boundaries of what is acceptable, break the mould and challenge the status quo.
Here at Superscript, three of the values that underpin our business are to be unstoppable, unafraid and unexpected, and many of the businesses we spoke to at CryptoCompare demonstrated these values in spades. As the crypto industry, we need to hold on to such qualities. Another takeaway from the summit, and something I've seen throughout my time inhabiting the digital asset world, is the positivity of all involved. There’s something to be said for working in a space solving problems, building, learning and creating every day.
One thing that surprised me was that despite all the talk around regulation, ESG wasn’t discussed at length during the conference. To me, regulation and ESG are generally not-too-distant cousins. A prime example of the confluence of ESG considerations and industry regulation was the recent Markets in Crypto Assets (MiCA) decision not to ban proof-of-work in Europe. The ECON committee voted not to move forward with language which would have essentially finished off any hope of nurturing a blockchain mining industry in Europe. I wholeheartedly agree with one panelist's point that perhaps we should change the ESG acronym to SGE because the Social and Governance aspects of the triumvirate are generally overlooked! The proof-of-work ESG debate is too lengthy to get into for this piece, however I have written a full article on the subject which you can read here.
If I could raise one note of caution from the day, it would be that there was some talk around fitting crypto into current regulatory frameworks to ensure the institutions come to us. There were also repeated calls for regulatory clarity to bring in the largest of the capital allocators. Personally, I think there’s another perspective, and that is that the current regulatory system is far from perfect. If we shoehorn crypto into these same, existing frameworks we will end up with a system that continues to exhibit the same old problems.
Collaboration with the regulators is the way forward and the crypto industry needs to be proactive. The crypto space should be putting forward ideas to regulate itself or we will be left with cumbersome rules and regs that create unintended consequences elsewhere in the ecosystem. Blockworks made a great point in a recent newsletter, pointing out that if we’d had regulatory clarity from the start we most likely wouldn’t have as many interesting projects, ideas and people working in the space. Regulation can entrench conservatism, whereas not always knowing where the line is and operating in a regulatory grey area could well be an advantage we’ve benefitted from without really knowing it. Something to think on.
Insurance isn’t boring!
For those of you reading this from an insurance background, you know the drill. You meet some nice new people for the first time and eventually someone pipes up, “so what do you do then?”, to which you reply “I work in insurance”. Cue the eyes glazing over, the endless explaining that the Lloyds you work for isn’t a bank and, no, we don’t all have a meerkat, bulldog or an opera singer for a mascot. Ultimately, insurance is a necessity purchase that no one, not businesses or individuals, really enjoys making.
I think this viewpoint comes from the fact that you don’t receive anything tangible (fluffy meerkat toys excluded) for your outlay until there’s a claim. In reality that’s not entirely true and is something underwriters and brokers are acutely aware of. Insurance offers value in other ways to businesses and individuals, such as risk advice and add-ons like consultancy services for risk mitigation.
Here at Superscript we truly want to understand the buyer's business to evaluate their specific needs and will recommend risk mitigation practices as well as other ideas when talking to clients. In our eyes, such an approach builds a long lasting and sustainable relationship which we aim to keep for many years. At Superscript, we are lucky enough to see clients that start small and grow into large and successful businesses. We aim to help facilitate that growth and have seen a number of businesses go from small acorns to mighty oaks in a matter of years.
Thinking from the perspective of a business founder seeking insurance, you are going to want the more traditional covers, such as D&O and Professional Indemnity to protect you from that rainy day scenario. But you will also want more cutting edge products such as smart contract risk and slashing insurance. As it stands, there are only a small number of forward-thinking insurers dipping their toes into the market to provide these new covers. For those capacity providers considering the space, now is the time to be carving out your place in the market. The digital asset businesses already operating in the space are motivated buyers with limited options available to them, so don’t worry there’s plenty to go around you are certainly ‘still early’.
In any event, if as an underwriter or broker you’re looking for work that is more interesting and you fancy a slight career pivot, then trust me when I say you should come and join in with the crypto community. Each of us that attended the CryptoCompare summit from Superscript came away from the day enthused and excited by interest shown in what we’re doing. If we are totally honest I think we were all somewhat surprised by the enthusiasm and appetite for insurance products designed for the digital asset community.
The institutions are here, well sort of
One of the most commonly-asked questions in the digital asset community is “when is this wall of institutional money coming?” If you haven’t already, I’d recommend:
- Reading Stuart Griffin's article about Investment in Distributed Ledger Technology
- Watching Chris Tyrer of Fidelity Digital Assets in conversation with Raoul Pal
Chris and Raoul’s conversation provides a great overview of what’s going on under the hood in the institutional space. The takeaway from that talk is that we are going to see a slowly-rising flow of money rather than any big bang as the dam bursts. Since Paul Tudor Jones came out in 2020 with his ‘fastest horse’ paper, and as other large fund managers have entered the space, the career risk element of shilling crypto to your superiors has diminished somewhat. If it’s good enough for Druck, Dalio and Soros, then let’s be honest you’re probably on the right track.
Perhaps of interest to some, was the lack of talk at the summit around price action. I'm not sure it was mentioned once, I think this shows how far the digital asset space has come. In my eyes, short term price action is irrelevant, unless you are a trader. I got the impression this holds true for the businesses entering, or already in, the crypto space. We are all betting on the direction of travel over the next ten years, not the direction of the next price tick one way or another.
Speaking of the direction of travel, from listening to the speakers, it feels like the crypto market is well on the runway to mass adoption, with the number of crypto users growing at 137% per annum (far outstripping the internet’s 76%). According to research by Global Macro Investor, crypto is projected to reach 1bn users by 2025.
From an institutional perspective, at CryptoCompare, there were plenty of VC’s, hedgies and FX markets among others in attendance. However, while some of the larger banks such as Morgan, Nomura and Goldman were represented in the crowd (but not in force), I don’t think we are quite there yet for the big pension and insurance allocators.
Because there are so many types of institutional investors, asking whether the institutions are here in the crypto space is too broad a question and the answer is more nuanced. Yes, institutions are here and they are here to stay but if you are talking about the largest of the capital allocators, the answer is they aren’t here in force right now, but they are most certainly coming for the space!
Decentralisation vs. Centralisation
A big debate in crypto is the one surrounding Decentralised Exchange (DEX) and Centralised Exchange (CEX). As you’d probably expect at more of an institutional event like CryptoCompare, there was a lean towards CEXs. Undoubtedly they have their place in the market - I don’t expect to see JP Morgan or Goldman providing liquidity on PancakeSwap any time soon, but give it five years!
What was clear, however, is that institutions want and require trusted partners for institutional grade staking. Providers such as Finoa, Figment, and Skillz provide such services, which are regularly available to the retail space but not necessarily with the trusted security an institution requires. Institutional staking is still a relatively small market, and we heard at the conference that institutional staking only represents roughly 10% of the total TVL overall of over $200bn in staking contracts. Certainly a growth area to keep an eye on going forwards.
In that respect, more centralised solutions make sense to ensure everything remains compliant and as secure as possible. Ultimately, more centralised entities are far more likely to engage with regulators and keep an eye on the ever changing regulatory landscape. They are also likely to look to the insurance industry to assist them in elements of risk transfer to protect their own balance sheets as institutional staking is in its infancy. Staking insurance is just taking its first look at the world!
To counter the above, the crypto purist in me still leans towards decentralisation. In my view, when you take away the single point of failure, you end up with a far more robust and far fairer system where one small minority is unable to put its own interests above those of the many. It was floated that crypto needed to get on board with the current ways of doing things to really bring in the big bucks from the capital allocators. It’s completely understandable when you’re talking hundreds of millions, to billions, to trillions of dollars, institutions need safeguards in place to ensure such large stakes are protected. What I would say is for those defending the current ways of doing things, I would urge you to stop and think whether the current way is the best way?
Centralisation and a lack of transparency has created some major issues recently. Think of the LME’s debacle with nickel futures or Melvin Capitals dalliance with meme stocks in early 2021. On both occasions markets were shuttered by centralised exchanges on the premise of investor protection, which investors were being protected on those occasions, I’ll let you decide. Concentration risk and a lack of transparency can create huge problems so a question I’m still wrestling with myself is this; is the current fragmentation in crypto markets a feature or a bug?
A final couple of takeaways on this front. Firstly there was Oliver von Landsberg-Sadie’s cri de cour that the successful businesses of the future must be prepared to disintermediate themselves. Some may find that shocking but if you think about it long enough you should see where the true opportunity lies there. The second final takeaway would be to never ask a UK audience to engage in vocal crowd participation, we are still struggling to rid ourselves of our Victorian stiff upper lip mentality.
NFTs, culture and creators
The final talk of the day discussed the opportunity in the NFT space. Perhaps given this was an institutional event and many had dinner, drinks and an afterparty on their minds (shoutout to Bitstamp) this event wasn’t at 100% capacity. In my eyes it was an error on behalf of those who chose not to attend. The NFT space is exploding and many are asking why? A beautifully simple response is, because it’s fun! NFT art pieces are quirky, funny and exciting. Many buyers of NFTs are not your traditional ‘crypto natives’. Indeed, for many this is their first foray into the space and with platforms including OpenSea now allowing users to purchase directly with credit cards without touching crypto I think we are likely to see even more growth.
Is there froth in the market? Almost certainly. But NFTs are far more than just overpriced JPEGs. What they represent is the opportunity to be part of a community that shares similar values, plus the ability to participate and profit from your own input, time and effort on a project. In an ever more fragmented and polarised society, that sense of belonging should never be underestimated. The combination of financial incentives, fun and strong branding together creates a powerful mix as highlighted by Leeor Groen (Spartan Group), Esmay Luck-Hille (SuperRare Labs) and Camilla McFarland (Mojito).\
NFTs offer brands, artists and creators the opportunity to truly engage with their audiences and take them on the journey with them, as well as the ability to reward them for their participation. Since joining Superscript I’ve been blown away by the number of credible NFT projects we see that have scaled and are requiring traditional insurance products. The panelists made a fantastic point, warning brands to ensure they look after their communities. If you go in with the intention purely of monetising your fanbase, you are quickly going to be found out. In the era of so-called ‘cancel culture’ and trial-by-social-media, getting your NFT strategy wrong is dangerous and could really affect your standing in the market.
A final note on NFTs this is not just about art, I repeat this is just not about art! Art is what got this off the ground. I will admit it’s taken me a while to get on board with NFTs and it’s easy to dismiss them as daft JPEGs (tell that to Yuga Labs and their BAYC holders with their $4bn valuation and $500k JPEGs). Now I’ve seen the enthusiasm that’s generated by those in the NFT space, I can see the value accrual there. Music looks to be next on the NFT hit list and then who knows what’s next? One thing is for sure, I wouldn’t bet against the innovators, builders and creators in the space. When you discover that there are multiple VC’s investing big money in gaming guilds, you know something’s coming over the hill and it’s not a monster!
And finally, the business card is not dead….yet!
A final takeaway from the summit was that It turns out the humble business card is not dead just yet. QR codes are fantastic and, yes, they are the future, but when your phone inevitably runs out of battery, some of the old school basics do come in handy. This is something I will be remembering for the next digital asset event I attend. I have to give a big shout out to the one business I met with that has fully laminated business cards, offering surefire protection against any afterparty drinks mishaps!
George Frith is part of Superscript’s digital asset team and specialises in the digital asset ecosystem, covering everything crypto and web3. He previously spent six years underwriting property business for a well-known Lloyd’s syndicate, developing new product offerings and gaining a strong understanding of risk management principles.
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