Is it possible to insure cryptocurrency? Well the short answer is yes and no, often you are simply offered ways to protect your transactions.
For those that are able to cover the contents of a crypto wallet you will find it is something insurance companies prefer to keep quiet about it, although they admit there is a “big opportunity” when it comes to cryptocurrency storage.
As Christian Weishuber, spokesman for Allianz told Bloomberg: “Digital assets are becoming more relevant, important and prevalent on the real economy and we are exploring product and coverage options in this area.” Yet, insurers are extremely careful and proceeding with caution.
The crypto world has been dubbed the “Wild West” for being unregulated, little understood and for large scale hacks. For this reason, many underwriting insurers prefer to stay under the radar. There are no public ads or companies promoting it, and some of them charge five times what an average business would pay to protect against loss and theft.
Some of them choose to cover only specific parts of the digital currency, such as during the process of purchasing the asset. In reality, cryptocurrency hacks hardly ever take place during the transactions themselves, which means there is no real protection in this case. So far, there have not been any payments from insurers to clients over their crypto losses, despite the hacks we know of.
Cryptocurrencies are relatively new phenomena, stepping into existence in 2009. Most of their user base have high technological skills, and they remain hard to use and understand for everyday users. The fluctuating price is a barrier for everyday use as well as for insurance, users find themselves underinsured as the policy that once fully covered a company’s assets can come up short as they balloon. This is what happened to crypto-finance firm Circle Internet Financial, which holds billions of dollars of assets for its customers.
While cryptocurrencies deliberately removed banks from the financial transactions, they also removed the protection they offered. There are no chargebacks or refunds in the crypto world; once the payment is done there is no way to get it back. The only way would be to “fork” the currency. This requires huge efforts and collaboration from the entire community, which makes it only applicable to huge hacks, such as in the case of the DAO.
When Smart Contracts were introduced, these digital currencies could now perform tasks that could replace lawyers or legal contracts – and so the money would be transferred automatically as soon as a specific event occurred. This feature added yet another grip for hackers who manipulated the code and exploited its weaknesses to cater for illegal transactions.
But smart contracts are not the only reason behind hacks. In some cases, inside jobs are the prime suspect, such as in the infamous case of Mt Gox. For these reasons, companies still seek insurance coverage, despite the high costs.
Interestingly, when Kingdom Trust applied for insurance, they received a drastic discount. The reason was their technology and working ethics: by implementing “cold wallets” for storing crypto, they are effectively removing any online access to the assets. This is a security best practice many exchanges follow – by always keeping part of their assets offline.
Others, like BitGo, talked to 75 different insurers to find the best deal after previously letting go of their insurance due to its high price.
For companies who don’t want to take either approach, the last resort is self-insurance. Self-insurance has a number of other benefits too, since there are no exclusions and no policies that would take months to approve. Trustology is one of these companies who is looking to protect accounts up to £85,000 which is standard coverage for a UK bank account and normally covered by the Financial Services Compensations Scheme (FSCS).
It seems that for now, this method works; when Bithumb, the world’s sixth largest cryptocurrency exchange, was hacked of $30 million, remarkably the company was able to cover the losses.
Of course, any aspect of the financial services sector – whether cryptocurrency or insurance – is risky if you don’t understand the reasoning behind it. This is why some countries such as Malta and Lithuania are working towards further regulations, and with these guidelines in place, we may see more opportunities in the insurance sector for cryptocurrency investors.
To learn more about the current regulatory landscape, please see our August roundup. And to learn more about how Copper is going the extra mile to secure our client's assets, please read about why we destroy private keys.
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