Fireside | Insuring Stablecoins at Institutional Scale

I love hot, fun, exciting topics like insurance. Uh, but we are at the right place for it. It is super important. Glenn, why don't you tell us a little bit about yourself and why, uh, they should listen to you about what's going on with institutional insurance.

Yeah, cool. Uh, I feel so far away from you up here, but uh, great to be here, everybody. Um, I joined the the insurance industry straight out of college and I've been working in digital assets since, uh, 2017. So it's an area that was passionate of mine but you know realized very quickly that risk controls and insurance is going to be a critical part for businesses to scale. Um you know and and there wasn't really anybody else doing it at the time.

So I was like oh this is a a good niche for me something to fall into. Um but it's been a very very slow adoption curve because um you know for right or wrong like industries had uh the industry has had a unhealthy relationship with insurance um partially because you have um you have all the bad actors that have a lot of have shaken out of the space giving you know a a blanket bad relationship to insurance but then you also have Uh then you also have the the the insurance companies that are pricing out a lot of the businesses. So it's just been friction for years and years. But you know now we we've we've definitely reached a different scale with regulation and you know adoption of institutions to where um people are pushing to a a much healthier place and capacity is growing prices going going down and it's enabling a lot of this um scaling that we're we're starting to see in the institutional side.

Yeah. The wild west that has been crypto has been incredibly risky. I mean, just October 10th, all of these stable coins disappeared uh or were proven to be undercolateralized. Um, how do you like pricing risk is what insurance is? What does it take to appease institutional grade insurers?

What are they wanting out of crypto? Um, what interests them about stable coins?

Yeah, it's an interesting question. I mean, I think right now we're we're very early days of adoption for stable coins. um insurers where we're seeing it play in insurance right now uh most commonly is uh the industry is is using captive structures and certain jurisdictions are now allowing stable coins as collateral for insurance. Uh we've seen it uh in in iOS products uh as well, you know, as a as a quicker way to to move in and out of those markets. But um for the for the most part for insurers, you know, I think that our industry is is very reactive instead of proactive.

Um but you know, when when you have things like the Genius Act and you start to see some of these companies successfully deploying applications, there's a few reinsurance companies that are using stable coins. Um it's it's slowly kind of starting to push that narrative and it works like a lot of other things in crypto where it's gradually and then suddenly you know it as soon as there is like some sort of uh gating factor that comes down you know everyone gets a lot more comfortable it becomes a lot more commonplace.

Cool. So using it as collateral accepting it for payments um that's kind of the use case of stables. Um you you helped with a deal between Paxos and Coinbase. Can you talk about what some details about that deal, what they were looking for, what you're able to enable?

Yeah, and I I think that that kind of goes along with the uh the theme here is that like we see the industry or the industry is traditionally reactive. Um at AON, we want to be proactive. Um something like crypto payments has been something that I've been passionate about. You know, the like my whole time in the industry, I've I've seen it as something that we could bring to crypto. Um but it wasn't until the passing of the Genius Act that it really actually becomes a reality because there truly are you know as a large global corporation you have so many gating factors um so many risks so much regulation um for so little benefit uh at at at the corporate level.

But ultimately we see it being that you know over time like stable coins is going to be a a another rail another rail for payments another rail to reduce reduce FX risk do cross crossber uh transactions instant liquidity uh 24/7 access and now that the genius act is passed and we see all these other corporations that are using stable coins more commonly it's like okay there a lot of this stuff has been derisked We think this is where the ball is moving. So, we want to start, you know, um, communicating to our partners that that's an area that we, you know, understand that we're going to be migrating to. And, uh, we want to be leaders and not followers in our very reactive bubble that we live in. Um, and so with the Paxos and Coinbase, um, you know, we being that they both deal a lot in stable coins, um, you know, we we said, "Why don't you why don't you pay us that way?" And of course, they were very excited to do so.

They want to pay as many of their partners like that. They're already moving their internal finances on stable coins and try to pay vendors on that. Um, so, you know, it it was a limited scope for us. you know, we didn't in this transaction where we pay, you know, uh, many different insurers. We don't pay them all in stable coins, unfortunately.

You know, they're not set up to receive on the same rails that we are. Um, but it still made it for a seamless transaction for premiums because uh for for Paxos and Coinbase to pay us, Paxos, PYUSD on Salana and Coinbase uh USDC uh on Ethereum um for you know all of their insurance premiums was a a micro case of what over time we kind of see it just being another option. you know, cash, check, uh, AC, stable coin. Um, but ultimately, like a lot of things are going to have to change before we can do that at scale with all of our partners and we get to realize many of those benefits um, that that come with it. But I think where we are coming from is that as a large global institution in 170 plus countries, this is going to be something that we're going to deal with.

So we wanted to communicate to the industry that we're not only helping people manage risk in this space but we're also um you know actively dealing and exploring some of these issues ourselves. So we have a intimate understanding about what is needed, what is lacking, how do you protect yourself and um you know how do you scale?

You've brought up the Genius Act a couple of times. um what about it has changed how you guys view stable coins and has this impacted how you're able to talk about stables or crypto um sides of businesses and digital assets to some of your vendors and other insurance companies. Yeah, I mean I think that the Genius Act is is critically important um in d-risking it for business um in in who you're you're talking to um and your partners going through internal risk committees. The Genius Act is, you know, we're still in rulemaking. So, like it we don't know what it actually formally looks like, but we want to use Genius aligned uh stable coins right now until there is further guidance, which also makes it a little bit more limiting on what we're able to do globally.

Um but that's fine because I think the way that our you know executives and our partners and internal stakeholders look at this is well we've now have uh a national alignment on what we want PPSIS to look like and you know while they're still working on some of those rules this is collectively what everyone has said this is going to be safe and then we you know go further than that because it's not just about uh you know the the the techn does the technology work. Um it's it's like what is the issuer what is their attitude towards risk? What are they doing to further implement controls and how do we know that it's safe? That's what everybody wants to know. How do we know is custody it's safe?

How do we know that these transactions are going to end up where they're supposed to for people who are not familiar with them? and you know how do we integrate this into our corporate treasury stack. Um so a lot of that is is something that we've experienced firsthand with you know our our customers and and they are trying to answer these questions for other institutions that they want to do business with and you know we get the firsthand experience of asking our our vendors that we work with like what are you doing about risk and how do you manage it? So how do we know that we are going to be safe and and that helps us get comfortable with the you know partners we work with and you know uh others that we're you know considering. Awesome.

We've talked a lot about how to bring crypto integration to traditional insurance. How are we bringing insurance to the crypto industry? What are some examples of businesses that can get their businesses insured and what can be insured? What can't? Well, I think that from a from a base understanding like crypto businesses are businesses just like anyone else.

Um, and I talk about that kind of like unhealthy relationship that has caused a a delay in adoption. Um, if you're a series B company, you might be thinking more about your next round of funding than what's happening 5 years down the line. But ultimately um risk transfer insurance is a way to smooth out your balance sheet and grow protected. So you have, you know, all the traditional products that you might consider from directors and officers, employment practices, cyber liability, but there's lots of derivatives of those products that apply directly to the insurance to the uh crypto industry when you talk about like hot and cold storage for custody, um smart contract insurance, um staking insurance for slashing. Um, and I think these are the areas where people are starting to focus more on.

Um, especially when you, you know, talk about all of the the onchain risk we have now. Like I think that there's still a long way to go because I think when it comes to onchain products, like you know, you and I have talked about vaults. Um, we we are operating that space right now. the I think the people who are the buyers right now are are focused on either using insurance as a tool to like a a a hedge for to hedge their bets on a product or they're using it as a way to increase their uh their AUM. Um we want to offset some of this risk so we can take on more of it um if we're going to be on different protocols.

So you can, you know, ensure things like, you know, oracle m manipulation and smart contract failure. Um, but we have to be really careful as a broker and as like an industry leader in helping our clients create some of these products that we're also not going to completely torch the insurance market because then we're not going to have an insurance market. And I think when you are looking at a lot of the onchain stuff, while there might be safe assets that there's still a lot of unsafe products and we see that with the, you know, uh, millions and millions that are getting lost in DeFi every month. And the insurers are sitting on the other side of this equation looking at this and they're like, well, we have no upside. you guys want to pay BIPS for this insurance and you know we want us to put up millions in return and we're you know effectively like putting our careers at risk if we write some of these like nasty losses in DeFi.

So I think where what we're missing right now in terms of being able to scale um is institutional grade standards where people around the industry can agree on what a safe operating environment looks like because even even still we do have we talked to a lot of people customers non-C customers that are want us to ensure risk that they're not comfortable taking on. So, if your like business is taking risk as a you know, asset manager, hedge fund, something like that, and you're not comfortable with it, like how do you expect the insurers to get comfortable with it? So, you know, it's it's it's kind of a little bit of a push and pull, but hopefully we're we're going to have some exciting things to offer in that front u that are much more scalable. I've been able to do some interesting work with like uh replacing spec reinsurance for medical companies with like um vault bonds or something with uh with Etherfi or um or doing like liquidity or liquidation insured money markets. Um thinking of insurance as a line of credit, but those are not actually with insurance companies.

They're rather insuring products with a technical moat. Um how do you think what crypto enables can replace anything? as the last question uh from the current insurance market. How do we decentralize insurance?

Well, I think some of it is going to be like private un unregulated products. Like that's honestly when you want a regulated insurer to stand in and take some of those bets like you know that it it goes all the way up through their stack through reinsurance through insurance league securities to their you know executive leadership and and how they approach that. And some of these things because of certain criteria are not actually considered to be insurance. Um you know insurance is is for unforeseen loss. It's not, you know, typically thought of as a as a hedge, um, you know, as an investment product, but it does get treated by investors like insurance, you know, just like sitting at the blackjack table.

But, um, I I I think that, you know, ultimately we're probably see um, some of this stuff onchain be more successful scaling in the reinsurance first because a lot of insurance still operates offchain. like you know you think about whether it's you know liability like what are the triggers are they bi are they um are they parametric um are they you know binary or is it like more complex where you get your lawyers involved and you have to create language and everything but I know we're out of time but uh uh hopefully uh some of this was helpful.

Thank you Glenn.

Thank you guys.