Crypto insurance: Should I insure my cryptocurrency assets?
As the cryptocurrency market grows, and so do thefts and scams, the crypto insurance sector is growing
If you are involved in cryptocurrency, you may be worried about your online assets being stolen. Can you be insured against losing your cryptocurrency? In short, yes, though the entire concept of crypto insurance is a relatively new one. Let us explain.
As more and more people getting involved in crypto, there are a growing number of hackers looking to take people’s money from both their crypto wallets and from exchanges.
On 20 August 2021, nearly $100m was stolen from the Japanese crypto exchange Liquid, while earlier in August, the Poly Network crypto platform had more than $600m stolen. While most of that money was returned by a hacker who called themselves Mr White Hat, the fact that so much was taken will have been a worry for crypto investors. While Poly Network was likely the victim of a so-called ethical hacker, who wanted to demonstrate the system’s vulnerabilities, the next organisation to fall victim may not be so lucky.
It is not just platforms and exchanges that fall victim to hackers. Wallets get hacked, and many individual investors keep their assets on exchanges anyway.
If you want to have peace of mind and secure your crypto assets, whether NFT, token, altcoin or bitcoin, insurance is a way to do it.
That said, there are relatively few specialised crypto insurance policies. This is at least partially because cryptocurrency as a specialised subject is comparatively recent. The idea only really got going in the wake of the financial crash of 2008-10 and, even then, for the first few years it was only bitcoin that was attracting interest and making headlines. There is also the issue of how cryptocurrency can be insured and what cryptocurrency can be insured.
Greg Bangs, head of XL Catlin’s North America crime coverage underwriting, said his company had to learn all about cryptocurrency before they started selling their own insurance. He said, “The first challenge for us was to figure out if there was a product here.”
According to Insurance Times, annual premiums for $10m in theft coverage would typically run at about $200,000, or 2% of the limit, against a premium of 1% or less of the sum covered for traditional financial clients, depending on the company, loss history and other factors. The publication also said that companies were more likely to offer crypto insurance for assets held offline than they were for crypto held in "hot storage", with "live" access on the internet.
At Coinbase, chief information security officer Philip Martin revealed in 2019 that his exchange had coverage provided by the insurance company Aon. Martin said, “We currently hold a hot wallet policy with a $255m limit placed by Lloyd’s registered broker Aon and sourced from a global group of US and UK insurance companies, including certain Lloyd’s of London syndicates.”
While the $255m figure sounds pretty impressive, at the time, that accounted for only about 2% of the total coins held by the exchange. The insured crypto was held in "hot storage", meaning it was connected to the internet, as opposed to the remaining coins, which were kept offline.
Martin said there was an important distinction when it came to cryptocurrency insurance to be made between specie insurance and crime insurance. He said, “Specie policies available in the market today focus on physical damage or loss of private keys, including employee misuse or theft, in cold storage.
“The specie market generally insures fine art, precious metals and the like when in a vault or on display. Generally the way I think about this market is insuring value at rest. They do not generally cover hacking in the traditional sense of the word, nor would they likely cover any kind of blockchain-specific failure.”
Martin said that crime insurance differed because they were “focused on hot wallet losses and include coverage for losses due to hacking, insider theft, fraudulent transfer, et cetera, including fiat and crypto currency, in addition to the physical damage or theft of private key data in cold storage.
While most crypto insurance seems to look at hacks of exchanges, there has been relatively little for people who had crypto stolen from their wallets. There has, however, been some change recently.
In February 2020, Lloyd’s of London launched its first insurance policy covering theft from crypto wallets and other forms of malicious hacks.
The policy was created by Lloyd’s syndicate Atrium in conjunction with Cardiff-based specialist crypto insurance company Coincover and is backed by a number of insurers who are members of Lloyd’s Product Innovation Facility, including Markel and TMK.
Atrium underwriter Matthew Greaves praised Lloyd’s for being innovative, saying, “There is a growing demand for insurance that can protect cryptocurrency as it becomes increasingly popular.”
Coincover CEO David Janczewski said he was happy to be working on a “unique and timely solution to the crypto asset market”.
He said, “As the crypto asset market heats up again at the start of 2020, a new wave of crypto-curious customers are standing by at the ready to jump in, having previously been put off by the lack of adequate protection against theft and loss. With this innovative new policy, we can remove these barriers and broaden the appeal of crypto. It represents another step forward in enabling cryptocurrency adoption.”
Trevor Maynard, Lloyd’s head of innovation, said, “As more money flows into the crypto asset market, losses from hacks are on the rise. Nevertheless, cryptocurrency companies have found ways to protect their digital assets from theft and, by working closely with Lloyd’s underwriters, to insure losses that do slip through the net.”
There are still challenges for the crypto insurance market, according to Greg Brown of the consultancy firm Oxbow Partners.
- A difficult technical underpinning
- Volatility affecting premiums
- Concentration risk
- Regulatory uncertainty
- A hard insurance market.
Dealing with all these issues is likely to be both tough and costly, and doubtless many companies are wary of becoming involved in the market because of that. But crypto insurance is likely to become increasingly important, and smart insurance companies will attempt to branch out and cover more kinds of cryptocurrency.
Yes, you can. How much cover you can get and what precisely it will cover will be between you and the insurance company to discuss.
You can now, since Coincover launched its Lloyd’s-backed policy in 2020. One thing to keep in mind is that the insurance starts covering losses of £1,000, so if you have less than that, it is possible that it may not be suitable for you.
Insurance companies are, perhaps understandably, reluctant to make the prices of their policies public, so you will have to discuss the matter with your insurance company.