Emerging industry solutions for insuring cryptocurrency

Arthur M. Salvadori, Steve Nestico
Emerging industry solutions for insuring cryptocurrency

Bitcoin, ethereum, cardano: These are just three of more than 18,000 different cryptocurrencies in the world.1 These digital assets are means of exchange created and used by private individuals or groups. Transactions are verified and records are maintained by decentralized systems using cryptography (blockchain) rather than by a centralized authority such as the Federal Reserve System.

Benefits of using cryptocurrency include government independence (not a fiat currency) and strong data security. However, the drawbacks include illiquidity and value volatility. Due to the ambiguity that surrounds these cryptocurrencies, many countries have had a lukewarm reaction to these forms of currency entering their economic environments. Some countries, such as China, have gone so far as to ban them.2

Cryptocurrency and digital finance exchanges are nothing new, beginning with mobile payment technologies going back to the late 1990s and early 2000s. However, it wasn’t until the late 2000s that bitcoin became the first publicly used means of exchange to combine decentralized control, user anonymity, record-keeping via a blockchain, and built-in scarcity.3 Today, cryptocurrency demand is stronger than ever, and the insurance industry is taking notice. In response, new insurance solutions are emerging.

Insuring cryptocurrency

Cryptocurrency owners have voiced the need for protection of their investments. However, while there's been demand for cryptocurrency insurance to cover everything from deposits to theft, the primary concern for insurers is underwriting risks. The ambiguity, complicated nature of decentralized trading, and lack of government regulation have made many insurers hesitate. At this time, only a limited number of insurers offer cryptocurrency insurance coverage, but as demand keeps growing, it might turn out to be a lucrative coverage offering.

The types of private crypto insurance that exist today are not currently targeted for consumers but are bought mainly by exchanges and crypto wallets. The coverage includes crime and theft, custodial insurance coverage, and business insurance, though more types are being explored.


Crime and fraud sector

Currently, the highest insurance costs are in the cryptocurrency crime and fraud sector,4 which is not surprising due to the millions of dollars in value of cryptocurrency that are lost each year due to scams, fraud, theft, and other corruption. For example, cryptocurrency worth more than $500 million was stolen from a Japanese cryptocurrency exchange in January 2018.5 In another instance, a major U.S.-based bitcoin and cryptocurrency exchange disclosed on Oct. 1, 2021, that a hacker was able to bypass the company’s text messaging multifactor authentication mechanism and steal funds from 6,000 users.6 And in January 2022, hackers stole $80 million worth of binance coins from a decentralized finance platform that allows users to loan and speculate on cryptocurrency price variations.7

Insuring the exchanges, crypto custodians, and other service providers

The largest insurance market in the cryptocurrency industry is insuring the exchanges against theft from cryptocurrency hackers. One trend in the cryptocurrency insurance sector is large exchanges creating their own insurance funds when commercial insurance is unavailable anywhere else.8 Certain cryptocurrency exchanges are backed by a risk-sharing pool in the form of a mutual allowing people to purchase a custody cover. The cover protects exchange users who lose 10% or more of their cryptocurrency assets (loss of tokens, not loss of value) in an exchange hack as well as withdrawals held in limbo for more than 90 days. This is also known as decentralized finance insurance.

Beginning in 2020, a Bermuda-based insurance company announced products to insure digital assets. The offerings include underwriting for crypto custodians and service providers, as well as other products tailored to the specific needs of the digital asset marketplace. The coverages are digital asset custody insurance, director and officer liability, professional liability, cybercrime coverage, and commercial crime coverage.

Insuring online wallets

Additionally, an insurance-backed cryptocurrency protection platform has partnered with a group of insurers based in the United Kingdom. During 2020, a new insurance policy was launched to protect cryptocurrency held in online wallets against theft or other malicious attacks. The coverage limit increases or decreases in line with the price changes of crypto assets; therefore, the insured is always indemnified for the underlying value of the cryptocurrency asset even if the value fluctuates over the policy period.

What’s next?

Notwithstanding these examples of cryptocurrency insurance offerings, insurance providers largely see cryptocurrency as a volatile market, which has resulted in expensive premiums for crypto investors. In addition, a lack of cohesive rules and regulations has led to many insurers taking a wait-and-see approach on cryptocurrency insurance coverage. However, if cryptocurrency becomes mainstream and subject to regulation, this might attract more insurers.

According to a Bloomberg report, cryptocurrency insurance is poised to become a “big opportunity.” A spokesperson for a major global insurer told the news publication that the company is exploring product and coverage options in the space because cryptocurrencies are “becoming more relevant, important and prevalent on the real economy.”9

With more organizations and governments exploring the opportunities presented by digital assets and increased regulatory clarity, a greater focus on insurance is expected in the years to come. Will we see the insurance market pivot and start offering a tide of direct-to-consumer insurance policies? Time will tell.

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Arthur Salvadori
Arthur M. Salvadori
Steve Nestico
Steve Nestico

1 CoinMarketCap.com, accessed March 8, 2022.
2 Marco Quiroz-Gutierrez, “Crypto Is Fully Banned in China and 8 Other Countries,” Fortune, Jan. 4, 2022, https://fortune.com/2022/01/04/crypto-banned-china-other-countries/
3 Brian Martucci, “What Is Cryptocurrency – How It Works, History and Bitcoin Alternatives,” Money Crashers, April 1, 2022, https://www.moneycrashers.com/cryptocurrency-history-bitcoin-alternatives/
4 Brian O'Connell, "Guide to Insurance on Cryptocurrency," Insurance Thought Leadership, March 3, 2021, https://www.insurancethoughtleadership.com/guide-to-insurance-on-cryptocurrency/
5 Evelyn Cheng, “Japanese Cryptocurrency Exchange Loses More Than $500 Million to Hackers,” CNBC, Jan. 26, 2018, https://www.cnbc.com/2018/01/26/japanese-cryptocurrency-exchange-loses-more-than-500-million-to-hackers.html
6 Namcios, “Coinbase Multi-Factor Authentication Hacked, Users Lose Funds,” Bitcoin Magazine, Oct. 1, 2021, https://bitcoinmagazine.com/business/hackers-rob-thousands-coinbase-customers-sms-mfa-flaw
7 Luc Olinga, “Victim of a $80M Crypto Theft, DeFi Platform Qubit, Begs Hackers for Its Money Back,” TheStreet, Jan. 30, 2022, https://www.thestreet.com/investing/cryptocurrency/-victim-of-a-80m-crypto-theft-defi-platform-qubit-begs-hackers-for-its-money-back
8 Insurance Thought Leadership.com: Guide to Insurance on Cryptocurrency
9 Olga Kharif, Brian Louis, Julie Edde, and Katherine Chiglinsky. “Stolen Crypto Millions Paid Back for Cents on Dollar, Guaranteed,” Bloomberg, July 19, 2018, https://www.bloomberg.com/news/articles/2018-07-19/crypto-heist-insurance-fat-premiums-lots-of-underwriting-risk