Digital Assets Move a Step Closer to Mainstream with Insured Custody

A Montreal-based financial services firm has launched an insurance program for digital assets held in custody. KNØX, working with Marsh, has developed a program to protect asset managers, liquidity providers, and exchanges against losses — including both external theft and internal collusion — up to the full value of their holdings.

KNØX can handle any digital asset, although the highest demand for custody has been for Bitcoin and Ether, the top cryptocurrencies by market capitalization. New types of digital assets can be added in a week or less. 

The company has received $6.2 million in funding, led by Initialized and iNovia, with participation from Fidelity Investments Canada, FJ Labs, and Ferst Capital.

The company said in its announcement that most custodians offer only partial insurance for digital assets. Its offerings appear to focus on loss by theft, and it provides security hardware and software. The platform is “collusion resistant,” and the insurance covers both external theft and internal theft by employees.

Alex Daskalov, KNØX’s CEO, has spent years understanding how insurance companies can insure information risk, said the company in an email. “He has worked with many technology firms on the best practices related to custodial risk, and built many software and hardware products over more than a decade of experience in the field.”

One thing the KNØX insurance does not cover, however, is price volatility, “as customers are choosing to expose themselves to the price fluctuations of this asset class. While volatile, Bitcoin and other digital assets have seen tremendous growth in the long term, and customers are seeking exposure to this upside,” the company said.

“Clients can access their KNØX custody account with a dedicated terminal via a secure end-to-end system. Internal control policies — rate limits and number of signatories — are set by firms as part of a customized governance model. KNØX is now unveiling its custody product to institutions as part of an early access program.”

The policy appears to be narrowly focused — the company’s announcement notes that the insurance underwriting has “designed a proprietary insurance program and bespoke policy wording with Marsh, the world’s leading insurance broker and risk adviser.”

The system is built with hardened terminals with access keys for administrators and executives to execute transactions efficiently and securely. KNØX said it has passed critical security audits for its core technology and infrastructure conducted by an independent security audit firm. Internal control policies — rate limits and number of signatories — are set by firms as part of a customized governance model.