A newcomer to the Bitcoin investment services scene is offering two-for-one protection in the form of custody and fully-backed insurance.
KNØX — a dual-nod to the mystic U.S. military base Fort Knox and (as evidenced by the value Ø) the hexadecimal literals used in coding — launched its custody solution today, September 24, 2019. This custody comes with a 100 percent deposit insurance, something that CEO Alex Daskalov said is a first for the fledgling industry of regulatory-grade bitcoin custody.
“We don’t see anywhere where someone can expect 100 percent coverage,” he told Bitcoin Magazine. “To this day we have not seen [properly insured custody]. There’s a lot of misinformation that exists, and in many cases we feel that [other providers] don’t adequately protect investors.”
Daskalov founded KNØX after noting this gap in the market. A bitcoin “O.G.” himself, he still ascribes to the oft-uttered maxim “Not your keys, not your coins.” He also came to realize that, for institutions, self-custody would never be a viable option.
“Second best thing you can do if you’re not going to hold your private keys is that you should have the right to have the full value of the assets insured,” he said.
100 Percent Bitcoin Custody
At launch, KNØX will be open to accredited individuals or institutions in Canada (its home turf), the U.S., U.K., EU and Asia. Leading up to this launch, the company accrued $6.2 million in funding from Initialized, iNova and Fidelity Investments Canada, among others.
Daskalov told us over the phone that the company’s combo-custody-insurance plans can be tailored to each client’s particular needs. For example, while some clients may want 100 percent asset protection, others may only want 20, 40 or 60 percent protection. They’ll also receive varying rates depending on how much they want to custody and the details of their business model. Daskalov said that the company can offer insurance coverage for as low as 1 percent of the custodied value.
Just as there’s a sliding scale for the amount and fee on the client’s side, insurers are assigned to tiers of coverage as well. KNØX’s “insurance tower,” as Daskalov called it, accommodates a variety of carriers with different risk appetites. Its insurance broker, Marsh, matches KNØX with insurance based on how much it is willing to cover (some, for instance, might be comfortable with $10 to $50 million, while others will go as high as $100 million).
These insurance companies will issue written attestations that they are willing to cover individual deposits up to these thresholds. Having done their technical homework to test and vet KNØX’s solutions, these attestations have the added benefit of ensuring customers that they are not only getting robust custody, but they’re also getting it at a good price.
“The proof is in the pudding. If you really have the safest solution, you ought to have the cheapest insurance rate. And we’re willing to fight in a free market context to say we have a solution so safe that we can get massive insurance capacity to back it,” Daskalov said. “If someone has the safest solution, the institutions ought not have to do technical due diligence to understand it. They ought to be able to rely on a price signal coming from the insurance market to inform them that this is safe or that someone has done the technical due diligence to take on the risk themselves.”
Establishing Bitcoin Custody Trust
On the topic of trust, KNØX’s insurance also insures client deposits against company malfeasance. So if you’re having issues trusting KNØX, it also protects against internal collusion. As Daskalov said, citing the conspiracy that Bitcoin’s greatest exchange hack was an inside job, “we all lived through Gox.”
Daskalov expressed throughout our call that underlying all of KNØX’s business logic is the idea that insurance, especially in such a high-octane market as bitcoin, should be more transparent.
Most of the current solutions, for example, only provide partial insurance or by aggregating customer deposits into lump plans with the insurance companies, Daskalov claimed, though he refrained from naming names so as to not throw any shade at his competitors.
“It’s either opaque or people are misinformed … percentages are critical,” he said. “When we say that we are capable of insuring up to 100 percent of an account, when someone comes in with $80 million in bitcoin, we will allocate an extra $80 million in our insurance tower, and then, using certificates signed by our broker, prove to [the client] that it is allocated to them exclusively.”
Daskalov holds that 100 percent reliable bitcoin custody is the last piece for creating a comfortable framework for institutions.
“There’s a glut of capital sitting on the sidelines waiting for the moment when the principal risk of theft and loss is taken care of,” as he put it.
Once this problem is solved, those sidelined players will suit up and get ready to play.
“Something we get from institutional customers who are onboarding is, they’ve already gotten comfortable with the volatility,” Daskalov concluded. “The only remaining hurdle is ensuring that they are not susceptible to the downside of theft and loss of the underlying instrument.”