Cryptocurrency: A Tough Sector to Financially Protect
The cryptocurrency market is largely unregulated by design, but that’s not stopping the industry from demanding more support from insurance companies. And to get the gist of this booming need, all you have to do is ask the experts.
“Everyone surely wants assurance that their hard-earned money is safe and secure,” said James Page, a technology executive at Crypto Head in Perth, Australia. “Cryptocurrencies are too risky for insurance providers which is why there isn't any wide coverage of such.
Consequently, there is significant demand for insurance providers to find a business model that caters to crypto-insurance. Yet this call has been neglected over time.” Page said the insurance market for cryptos is still relatively nascent.
“The Great American Insurance Group was the first insurance agency to offer cryptocurrency insurance, in mid-2014,” he said. around mid of 2014. “Yet even after a couple of years, cryptocurrencies still remain uninsured.”
The Insurance Industry Shields Cryptocurrency Investors... to a Limit
“Back in November, coin desk issued $6 billion insurance coverage for all available cryptocurrencies, but these figures only compose of about 4.2 percent of the total value of the market,” he said. “It was a big step for insurance companies and they took a risk. But it showed insurers that covering the crypto market wasn’t impossible.”
An industry valued at $10.6 billion in 2013, the cryptocurrency market has skyrocketed to $758 billion in 2020. Yet a so-called “Wild, Wild West” market environment has fueled caution among most insurance companies, which are not on board with cryptocurrencies.
“Despite its huge popularity surge in recent years, cryptocurrency insurance coverage is not widely available,” said Chris Abrams, founder of Abrams Insurance Solutions, in San Diego, Cal. “The crypto market faces the unique challenge of being highly volatile and relatively new.”
The lack of available data mixed with the high liability for insurers has left many of the big-name providers to steer clever of the crypto market. “Most coverage is offered by crypto exchanges to protect clients against theft and fraud,” Abrams said.
Insurance for Cryptocurrency: What's Available
By and large, cryptocurrency insurance policies protect investors and industry companies against cryptocurrency losses, theft, and general cryptocurrency capital loss.
Now that the crypto market has a foothold on insurance protection, what types of insurance are available for industry consumers? “Basically, cryptocurrency insurance can be classified into several key areas,” said Sharon Henley, Chief Product Officer at U.K.-based Coincover, which delivers crypto insurance at the hot wallet level.
1. Crime insurance. Theft, internal collusion, hacks. “This coverage comes into play if your crypto is stolen,” Henley said. That scenario happens more than investors might think. Back in 2014, Mt. Gox shed $460 million in cryptocurrencies to data thieves while a breach cost Coincheck $530 million worth of customer cryptocurrencies in 2018.
2. Custody insurance, including key storage, key recovery, disaster recovery, and cold-storage. “Custody insurance kicks in when you lose access to your crypto keys or the business holding your crypto goes out of business,” Henley noted. Industry data showed that between 17 percent and 23 percent of all bitcoins have keys have been lost, likely forever, signaling a potentially robust market for custody insurance.
3. Business insurance, including professional indemnity insurance (PII) and directors and officers liability (D&O) insurance. “These insurance plans primarily mean general directors insurance, but it’s becoming harder to get for crypto businesses,” Henley said. That’s due primarily to the loose regulations and high volatility of the cryptocurrency, along with the higher probability of cyberbreaches compared to traditional investment markets.
4. Decentralized Finance (DeFi) insurance. “Also called smart contract insurance, this insurance seeks to ensure a cryptocurrency’s software is hack proof and that it’s delivering on the promise of the transaction execution,” Henley added.
Some Insurers Are Stepping Up for Cryptocurrency
Although options are limited, crypto insurance coverage does exist.
“Etherisc is one of the largest providers of the crypto market,” Abrams said. “Since they focused on decentralized insurance, Etherisc is a go-to option for crypto investors. They provide up to $1 million in coverage against attacks on crypto wallets. Exchanges like Bitstamp and Coinbase also cover crime-related losses to inspire confidence in investors.”
Other main industry insurers include Coincover, which is underwritten by Lloyds of London and Aon. On the DeFi and assets on exchange sides of the insurance equation, Nexus Mutual is becoming more active as insurance provider.
That said, the crypto industry still has a “help wanted” sign hanging on market doors, as demand for good insurance rises, industry experts say.
“Insuring Bitcoin and other cryptocurrencies are different because the insurance industry is highly established and regulated while the cryptocurrency industry is not,” said Savannah Bilbo, a cryptocurrency specialist as Pelicoin, a secure ATM crypto network operating in southern U.S. states. “Since cryptocurrency is largely unregulated, insured exchanges are a requirement like regular funds are.”
Right now, insuring Bitcoin is similar to insuring cash - people can steal it quickly, and when that happens, it’s nearly impossible to get it back. “This high risk creates incredibly high premiums,” Bilbo said.
Cryptocurrency Exchange Insurance: The Big Picture
One area showing signs of promise on the crypto insurance front is in exchange insurance. With more stability (at least with the more sizable exchanges), insurers are increasingly viewing exchanges and third-party custodians as a good platform for insurance help.
“Exchanges have different types of insurance,” Henley said. “For example, they may have a blanket insurance for their cold storage offerings, like when $100 million is spread across all holdings.
Some exchanges such as Gatehub provide wallets to their users where they can purchase individual cover for the contents of their wallet. Additionally, some exchanges like Coinbase have supplementary insurance, by Nexus, where customers are covered when they lose more than 10% of their assets.”
Aside from Coinbase, cryptocurrency exchanges like BitRex ($300 million in insurance coverage); BitGo ($100 million underwritten by Lloyds of London); Gemini ($200 million, underwritten by a Gemini subsidiary); Fireblocks ($30 million); and CURV ($50 million) all have some level of insurance coverage.”
What Does the Future Hold for Cryptocurrency Insurance?
As the cryptocurrency landscape matures, cryptocurrency investors might understandably wonder what levels of insurance may exist in the future.
“We’re looking at InsureTech as an industry segment, as well as insurance products in general, as markets that are certainly set to evolve in the crypto space,” Henley said. “We see a world where users cryptocurrency holders will be afforded the same type of protection the U.S. Federal Deposit Insurance Corp. (FDIC) provides for bank deposits.”
Henley said industry insurers, like Coincover, should not only protect against the main cryptocurrency theft risk vectors, “but also against lost access to funds should you lose your private key, or if the business you are working with goes out of business.”
Industry insurers need to get creative, too. “Right now, we’re providing cryptocurrency wills, which enables crypto assets to be inherited by loved ones, without having to disclose confidential or security information,” Henley noted.
Coincover also sees significantly more insurance products developing in the PII, and D&O spaces – which as a great need for solid insurance coverage. “We’re working on launching such products within 2021, as it’s become increasingly hard for crypto players to obtain coverage,” Henley said.
Other insurance targets include volatility insurance, which protects against a downside market crash, escrow insurance, which covers large “whale-size” cryptocurrency transactions.
“We’re also seeing institutional investors come to us for “top-up” insurance, which adds to the existing level of coverage already obtained,” Henley added. “This way, institutional investors can guarantee their crypto funds are fully protected.
Insurance Tips for Cryptocurrency Investors Looking for Better Protection
If you’re either an investor or business owner in the cryptocurrency space, take these action steps to land the best insurance policy possible.
- Check the fine print. As with any financial document, it’s always important to read the fine print on any crypto insurance policies. “A number of exchanges will have an impressive quoted insurance number, but read between the lines,” Henley said. “For example, an insurer says it covers $100 million, but assets under their control could equate to $1 billion. Consequently, only 10% of the funds are actually covered by the insurer.”
- Share keys. There are several other ways to protect your crypto investments. For example, Bilbo recommends sharing private keys with trusted, independent custodians. “This can safeguard your wallet against theft,” she said. “It’s also a good idea to spread your investments into multiple wallets to avoid keeping all your eggs in one basket. This can minimize your risk in case one wallet goes belly up.”
- Know how the keys are protected. When working with a cryptocurrency custodian, ask if your funds are lent out to other exchanges or investors as this increases the risk profile. “Good questions to ask in this scenario include “Is there a deductible to pay on a claim?” and “How is the amount of theft calculated?,” Henley stated. “Also ask if an exchange is hacked and has funds stolen, how and when will the funds be returned and distributed?”
- Diversify wallet holdings. Abrams also recommend sharing private keys with trusted, independent custodians, but he advises taking an extra step in doing so. “Sharing keys can safeguard your wallet against theft,” he said. “It’s also a good idea to spread your investments into multiple wallets to avoid keeping all your eggs in one basket. This can minimize your risk in case one wallet goes belly up.”
If current insurance options are limited (which they look like they are), how do you keep your crypto safe? “Safe” is quite debatable and many have a preference, but Henley considers most crypto safety options come with a compromise or trade-off.
“For example, offline wallets or paper wallets are considered safe but you don’t have easy liquidity and access to trade,” she said. “You are also responsible for storing your wallet or paper in a safe place, as well as providing instructions should you pass on.”
“Always remember, hot wallets can be prone to attacks and theft,” Henley added. “Web-based cryptocurrency wallets are even easier to hack.”