Since the first Bitcoin block was mined way back in 2009, more than $1 billion has been stolen from crypto exchanges and wallets across the globe. While this may seem insignificant when compared to a global market cap of $1.9 trillion, it certainly is cause for concern.
While crypto exchanges and wallets continue to strengthen their security measures to protect their investors’ digital assets, cryptocurrency insurance is certainly helping to reduce the risk to investors. It’s easy to understand why hackers target cryptocurrencies as there is no paper trail to the thieves.
Cybercriminals only need to infiltrate the private key details before transferring the cryptocurrency contained in that wallet to their anonymous accounts. Although crypto storage and exchange services have the utmost confidence in their security protocols, insuring crypto can be regarded as an external seal of approval that puts investors’ minds at ease.
Do cryptocurrencies need insurance?
With the crypto market reaching exponential heights in 2021 from a growing number of investors, there is also an increased need for crypto insurance that helps to protect the interests of investors. Investors want peace of mind knowing that their digital assets are safe, and crypto insurance provides comfort from the very real threats that crypto exchanges and wallets are susceptible to.
When taking into consideration the instability of the cryptocurrency ecosystem, it becomes quite apparent how important cryptocurrency insurance is. With more money flooding the crypto-asset market, hackers are having a field day with investor losses on the rise in 2021. The result of these increased crypto hacks indicates severe vulnerabilities in the cryptocurrency ecosystem.
Challenges facing cryptocurrency insurance
Some of the factors that insurers consider when it comes to underwriting crypto are the expertise and experience of the management team, measures in place for physical and online security, and how digital assets are segregated within their systems.
Cryptocurrencies pose a unique challenge for insurers as they usually refer to historical data during the underwriting process. This data is largely absent in a crypto market that is inherently volatile. Moreover, it is very difficult to forecast advances in technology and how they will affect the crypto market.
Unpredictable market swings will affect premiums in a manner that insurers cannot commit to. While a premium may be confirmed today based on the current associated risks, advancements in technology will completely change that dynamic. Insurers will need to constantly monitor both the crypto market and technological developments to stay abreast of risks, and this is not a feasible proposition for most insurers.
Cryptocurrency insurance also gets tricky as regulatory uncertainty in different regions coupled with inconsistent oversight protocols at crypto exchanges can make matters complicated. Insurers who are willing to insure cryptocurrencies have the challenge of determining the correct party to insure.
Although crypto is purchased by buyers, the records are maintained by crypto exchanges. There are also third-party companies that provide digital wallets to investors. In the event of a breach, all of these parties will be at risk and insurers must be absolutely sure of which party will be compensated if there are losses incurred.
Another important factor to consider is what currency a claim will be paid out in. Insurers from different countries are usually paid premiums in the native currency of their country. With fluctuations of fiat currencies occurring daily, there will be grey areas when it comes to the claim stage as crypto may have been bought in a foreign currency. Regulators may also have to get involved as they need to ascertain if an insurer does, indeed, have adequate reserves to settle such claims.
Anonymity is a major attraction for investors who use cryptocurrencies. Such anonymity is not popular in the insurance industry and policies cannot be issued to beneficiaries that remain anonymous. With that being said, cryptocurrency insurance will only be available to a select group of investors who hold cryptocurrencies — essentially meaning that crypto-insurance will not be available for a large portion of the crypto community despite their appetite for it.
Companies specialising in crypto-insurance
While there is a huge demand for cryptocurrency insurance, very few insurers are willing to underwrite such risky policies due to the various challenges described above. Considering the crypto scene is an emerging market for the insurance industry, underwriters appear cautious and look for reassurances from crypto storage and exchange platforms that their risks are well managed and stringent security measures are implemented.
While most of the major insurers are yet to dive into the crypto wave, businesses and investors do have insurance options available to protect their interests. There are some insurers who have taken incredible strides towards making crypto-insurance available and these include Coincover, Nexus Mutual, Bridge Mutual, and AIG.
Coincover offers Custody insurance if a user loses access to crypto keys or the company holding digital assets goes bust. Nexus Mutual and Bridge Mutual offer Smart Contract insurance or DeFi insurance that offers cover for the failure of smart contracts. AIG offers Crime insurance that covers commercial entities for the loss of money, securities, and other asset types due to theft, fraud, or dishonesty.
Since the insurance industry is highly regulated and the crypto industry isn’t, there is a lot of additional underwriting requirements that must be considered by those insurers who are willing to provide crypto cover.
Although there is a willing market of investors that are ready to get cover for their cryptocurrency portfolios, many insurers are cautious about providing policies to investors who have committed to such an unregulated industry. While that may be the case, great crypto-insurance options are available for investors to secure their crypto. Always remember to read the fine print and know exactly what your cover entails to avoid your claims being repudiated later.
Note that trading in cryptocurrencies is a risky and highly speculative proposition. This article does not provide recommendations, advice, or guidance regarding crypto trading and insurance but is rather our opinion on such activities. Investors must conduct their own research and engage in the services of qualified professionals before making any financial and/or cryptocurrency investment decisions. We do, however, recommend established platforms like Wisly to monitor and analyse your crypto investments.