Cryptocurrency has been getting a lot of attention lately as a fast-growing and promising industry. However, with its potential for high returns comes several dangers as well. The unpredictable nature of crypto markets and the risk of cyber-attacks have made investors and companies concerned about keeping their assets safe.
Crypto insurance offers protection against these risks and ensures peace of mind for individuals and businesses. This article will discuss crypto insurance, its importance in today's digital landscape, and how to obtain coverage to safeguard your investments.
What is Crypto Insurance?
Crypto insurance is a type of coverage that protects digital assets and cryptocurrency businesses from risks in the unpredictable crypto market. As the crypto world grows, the need for financial protection against losses also increases.
Types of Coverage
Crypto insurance policies typically offer coverage for institutions such as exchanges rather than individual consumers. These policies aim to safeguard against losses resulting from specific circumstances, such as exchange hacks or system failures. For instance, Coinbase uses crime insurance to protect its assets from theft, including cybersecurity breaches.
Risks Covered
Crypto insurance policies generally cover a range of risks associated with digital assets. These may include:
- Theft: Protection against unauthorized access and theft of cryptocurrency from online wallets or exchanges.
- Hacks: Coverage for losses resulting from cybersecurity breaches and hacking attempts.
- System failures: Insurance against losses caused by technical glitches or failures in the exchange's systems.
Some exchanges have established their insurance funds to protect users. For example, Binance created the Secured Asset Fund for Users (SAFU) in 2018, which uses a percentage of trading fees to safeguard user funds in emergencies.
Exclusions
Crypto insurance offers useful protection, but these policies have limitations and exclusions. Some common ones include:
- Market fluctuations: Losses due to the volatile nature of cryptocurrency prices are typically not covered.
- Ponzi schemes: Losses resulting from fraudulent investment schemes are generally excluded.
- Direct hardware loss: Physical loss or damage to hardware wallets or storage devices may not be covered.
- Blockchain failures: Issues related to the underlying blockchain technology are often excluded from coverage.
It's worth noting that most crypto insurance policies do not cover individual consumers unless their cryptocurrency is involved in an exchange hack or system failure. Also, there are no policies that protect those who keep their private keys themselves.
Since the crypto insurance market is still new, policy details are often unclear and changing — coverage can differ greatly from one insurer to another. Thus, organizations should be careful about common limitations when seeking protection against new risks.
Some cryptocurrency experts recommend buying multiple policies. However, this can be too expensive for some companies and individuals.
Types of Crypto Insurance Policies
The crypto space carries unique risks, prompting companies to create specific insurance policies. Some of them aim to safeguard investors’ funds; others are specifically tailored to corporate needs. Here are the most common types:
Exchange Insurance
Cryptocurrency exchanges have become prime targets for hackers and cybercriminals. To mitigate this risk, exchanges implemented insurance measures to protect their users' funds.
One notable example is Binance, which established SAFU in 2018. This emergency digital asset insurance fund uses a percentage of trading fees to safeguard user funds in case of emergencies. When Binance was hacked for $40 million in 2019, the exchange claimed that its investors were unaffected due to SAFU's protections.
Similarly, Coinbase employs crime insurance to protect its assets from theft, including cases of cybersecurity breaches. However, this coverage does not extend to individual accounts in cases of unauthorized access due to a breach or loss of credentials.
Wallet Insurance
Wallet insurance protects cryptocurrency holders from losses related to their digital wallets. This type of insurance has become increasingly important as more individuals and institutions enter the crypto market.
Ledger, one of the leading hardware wallet providers, offers insurance for its Ledger Vault platform through a customized crime insurance program. This policy provides up to $150 million in coverage for third-party theft of master seeds and private keys, secure transmissions of master seed fragments, and insider employee theft.
Custody Insurance
Cryptocurrency custody solutions are crucial for institutional investors with significant digital assets. These third-party security providers keep crypto assets safe, mainly catering to hedge funds, exchanges, and exchange-traded funds.
Custody insurance offers an additional layer of digital asset protection for funds held by qualified custodians. Some of the leading custodial service providers include:
- Coinbase Custody: The custodial services arm of the popular exchange Coinbase.
- Gemini Custody: The custodial solution provider for Gemini Exchange.
- BitGo Trust Company: A large qualified custodian licensed by the New York State Department of Financial Services.
Why Crypto Insurance is Necessary
The fast-changing world of cryptocurrency presents many challenges and risks, making insurance crucial for digital assets.
Growing Cryptocurrency Market
The expanding cryptocurrency market has led to a surge in public interest and investment. This growth has also attracted the attention of regulators and financial institutions. MassMutual, a major insurance company, purchased $100 million in Bitcoin for its general investment account in 2020.
The lack of comprehensive regulations in cryptocurrency transactions has created an environment ripe for illicit activities. According to Chainalysis' 2022 Crypto Crime Report, cryptocurrency-based crime reached an all-time high in 2022, with illicit addresses receiving $20.6 billion, up from $18 billion in 2021. This alarming trend underscores the urgent need for protective measures in the crypto space.
Increasing Cyber Threats
The digital nature of cryptocurrencies makes them particularly vulnerable to cyber-attacks. Several major incidents reflect the severity of these threats:
- Hacks: In 2021, over $600 million was stolen from Poly Network, a decentralized finance platform, by an anonymous hacker.
- Fraud and Phishing: The Coincheck cryptocurrency exchange suffered a theft of $500 million.
- Malware: Malicious software can compromise users' devices and steal their cryptocurrency. In 2020, the infamous Emotet malware was found to be targeting Bitcoin wallets.
The interconnected nature of the financial system exacerbates this risk. If one institution suffers a successful cyber attack, it could quickly affect the whole network, leading to major disruptions and losses.
Regulatory Uncertainties
The cryptocurrency market operates in a regulatory gray area, which has had a significant impact on its development and security. Regulatory uncertainty creates barriers for reputable players in the industry, as they are hesitant to enter a market with unclear rules and potential legal risks.
This lack of clear regulations has several consequences:
- Increased vulnerability: The absence of standardized security protocols leaves the crypto ecosystem more susceptible to attacks and fraud.
- Limited consumer protection: Without comprehensive regulations, individual investors often lack adequate protection against losses.
- Regulatory challenges: The 24/7 nature of blockchain technology makes it difficult for traditional regulatory approaches to keep pace with the market's rapid movements.
The current rules often result in enforcement happening through lawsuits instead of proactive measures. This approach can be suboptimal, as lawsuits can be time-consuming and may not provide timely protection for investors.
However, as of 2024, the situation surrounding regulatory uncertainties in the crypto market appears to be improving. Various countries and governing bodies are beginning to implement more comprehensive regulations, addressing some of the previously mentioned consequences.
Given all these challenges, crypto insurance has become increasingly important in reducing cryptocurrency risks for companies. As the market changes, crypto insurance will likely play an even bigger role in building trust and stability in the world of digital assets.
How to Get Crypto Insurance Coverage
So, how can individuals and companies get their crypto insured? Here are some key steps to consider:
Analyzing Requirements
Obtaining crypto insurance coverage begins with a thorough assessment of one's needs. Individuals and businesses should evaluate their risk profile, considering factors such as the value of their digital assets, security measures in place, and trading activity. This evaluation helps determine the type and extent of coverage required.
Researching Providers
Once needs are assessed, the next step is to research BTC insurance services. Currently, there's a rising demand for cryptocurrency insurance, particularly for theft. However, the crypto and insurance industry's lack of cohesive regulations complicates the underwriting process for insurers.
Some of the best crypto insurance in the market include:
CoinCover
A British company that offers various insurance protection products. It focuses on protecting cryptocurrency assets for both individuals and businesses. Coincover also offers special features like a crypto asset recovery in partnership with Sygnum Bank to help users get back lost or stolen assets.
Lloyd's of London
Lloyd's of London is a leading UK-based insurance marketplace. Lloyd’s introduced a groundbreaking insurance policy in collaboration with CoinCover to protect cryptocurrency held in online wallets against theft and hacks.
AON
AON is a prominent insurance firm that specializes in risk solutions for businesses and is publicly traded on the New York Stock Exchange. The company offers tailored risk management services for blockchain-related enterprises, including cryptocurrency brokerages, miners, and blockchain protocols.
Application Process
The application process for crypto insurance typically involves several steps:
- Risk Assessment: Insurers carefully review the applicant's risk level. They look at the value of digital assets, the security measures being used, trading activity, and compliance with regulations.
- Policy Tailoring: Insurers tailor policies to fit the applicant's needs and their comfortable risk based on the risk assessment.
- Premium Calculation: Premiums are figured out based on various factors like market trends, past breach data, asset values, coverage limits, and security measures.
- Underwriting: This step checks if a risk can be insured and decides the terms for coverage. Underwriters look at the security measures, how the business operates, whether it follows the rules and its financial health.
- Policy Review: Applicants should look closely at the policy details, focusing on coverage limits, exclusions, and restrictions.
- Security Compliance: To stay eligible and improve security, applicants need to follow strict rules set by insurers. This means using strong security measures and sticking to the best practices in the industry.
- Claims Process Familiarization: It's important to understand how to file a claim, what documents you need, and how to resolve any disputes. This helps you communicate better with insurance companies and get your claims settled quickly.
Conclusion
Cryptocurrency comes with specific risks that may need special insurance coverage, particularly for companies and startups. No matter how comprehensive security measures may be, it is always a smart move to have an additional layer of protection.
