With each passing month, cryptocurrency is gaining acceptance as a major investment opportunity for millions of people around the world. However, investing in cryptocurrency comes with its own share of risk. It is therefore preferable to take out insurance.
Crypto insurance may not be as straightforward as other forms of insurance, such as those covering life, health, or valuables risks. Additionally, insurance companies have not been very open about the highly risky crypto market, for obvious reasons such as difficulty with the technical intricacies of blockchain and the lack of insurance-specific definitions. key components around digital assets.
Yet the tide is changing; some big names in the insurance world are gradually getting into the digital currency insurance game.
Why is crypto insurance necessary?
Crypto insurance is like any other insurance policy – its main purpose is to provide coverage against the loss of tokens. However, this warrants a single insurance scheme as cryptocurrency is not legal tender and the factors affecting it are distinct from other payment or investment systems such as bonds, stocks and bank deposits. .
The main factors that use blockchain, especially digital currencies, include assets, hacks, and scams.
Cryptocurrency is extremely volatile. Cryptocurrency market fluctuations can be drastic in a single day or over several months for any reason – from government decisions to a tweet from an influencer like Elon Musk. For example, the value of one Bitcoin, the oldest and most valuable of all cryptocurrencies, was just over $67,000 on November 8, 2021. As of June 14, 2022, it was trading at just over $67,000. over $22,000, a drop of about 67%. in seven months.
This requirement is mainly due to the fact that cryptocurrency is very new in the markets and most of the largest economies in the world are facing a dilemma regarding its absolute acceptance.
However, this is only part of the concerns investors have about securing the money they have included in crypto.
One of the biggest threats to the crypto world comes in the form of hacking. There have been many cases of hackers infiltrating cryptocurrency exchanges and stealing digital devices worth millions.
In 2020, hackers stole cryptocurrency worth $200 million from a Singapore-based crypto exchange, KuCoin. The largest recorded hacking incident took place in August 2021 when $610 million disappeared from the DeFi Poly Network site. Most of this amount, however, was returned by the hacker in the same month.
The second largest hack took place on March 23, 2022, when $540 million worth of cryptocurrency was stolen from the Ronin blockchain project.
Additionally, the hack has led to the collapse of exchanges such as Mt Gox in Japan.
And unlike stolen real currency which can be controlled by freezing the thief’s accounts, stolen cryptocurrencies come with another hurdle to law enforcement: it is impossible to obtain stolen tokens from a hacker without a private key. That’s exactly what happened when in October 2021, an 18-year-old hacker stole assets worth $16 million from cryptocurrency platform Indexed Finance and disappeared. Although he knows who he is, nothing concrete could be done.
A June 3, 2022 report from the U.S. Federal Trade Commission (FTC) found that over 46,000 people said they lost over $1 billion in crypto to scams between January 1, 2021 and on March 31, 2022. That was more than any other payment method, the FTC noted. . The US government body also found that 70% of scams involved Bitcoin, and more than half of all scams originated from a malicious advertisement, social media post or message.
Losing or forgetting the private key, which is a secret number similar to a password, can also be a major problem for investors. Since the private key is unrecoverable, forgetting means that funds in an account may never be realized. Private keys can also be stolen by hackers if they exist on a device or service, such as a custodial wallet, that may be connected to the internet.
And these serious problems exist while cryptocurrencies have not yet become a mainstream means of payment. Consequently, there is a sustained demand for cryptocurrency insurance, which is forcing some leading insurers to take their first steps into this segment of the policy market.
Major exchanges such as Coinbase and Gemini have invested millions of dollars in insuring digital assets. Many of them also have directors’ and officers’ insurance purchased to indemnify officers for costs incurred in litigation or investigations.
In May 2022, British start-up Superscript, which is a licensed broker under Lloyd’s, launched Daylight – crypto loss insurance protection.
In a statement, Superscript said the Daylight insurance policy is designed to secure tokenization platforms, miners, custodians, blockchain developers, and non-fungible token (NFT) platforms.
The company added that the first coverages under Daylight will be technology liability and cyber insurance, indicating the serious threats that hacks and scams pose to the blockchain.
Exponent further said that the first covers protect businesses against a range of risks, including ransomware attacks, cyber business interruptions and professional negligence. Coverage for directors and officers, guardianship and minors will be created.
An interesting policy was introduced by Lloyd’s in February 2020, through its syndicate Atrium in conjunction with Coincover. This made Lloyd’s one of the first major insurance players to launch a crypto insurance program and is one of the few to directly indemnify customers.
Lloyd’s insurance cover is designed to insure cryptocurrency held in online wallets and starts from 1,000 GBP (1,212 USD, as of June 16, 2022).
“This is a new type of liability insurance policy with a dynamic limit that increases or decreases based on changes in the price of crypto assets. This means that the insured will always be compensated for the underlying value of their assets under management, even if this fluctuates during the policy period,” Lloyd’s said in its statement announcing the policy.
However, although there are few players in the market who insure against the loss of cryptocurrency, most existing policies target businesses that require crypto and not customers.
(Main and featured images: Kanchanara/@kanchanara/Unsplash)