Everything you need to know about cryptocurrency insurance

With each passing month, cryptocurrency is being accepted 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 simple as other forms of insurance, such as insurance that covers life, health or valuables risks. In addition, insurance companies have not been very open about the high-risk crypto market, for obvious reasons, such as difficulties with the technical intricacies of blockchain and the lack of insurance-specific definitions, important components around digital assets.

Yet the tide is changing; some big names in the insurance world are gradually entering the digital currency insurance game.

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Why is crypto insurance necessary?

Image: Courtesy of Kanchanara/@kanchanara/Unsplash

Crypto insurance is just like any other insurance policy – its main purpose is to provide cover against the loss of tokens. However, this justifies a single insurance scheme as cryptocurrency is not legal tender and the factors influencing it differ from other payment or investment systems such as bonds, stocks and bank deposits.

The main factors using blockchain, especially digital currencies, are assets, hacks and scams.

volatility

Cryptocurrency is extremely volatile. Fluctuations in the cryptocurrency market 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. On June 14, 2022, it was trading at just over $67,000. Over $22,000, down about 67%. in seven months.

This requirement is mainly due to the fact that cryptocurrency is very new to the markets and most of the largest economies in the world are faced with a dilemma regarding its absolute adoption.

However, this is only part of the concerns investors have about securing the money they have withdrawn in crypto.

piracy

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 $200 million worth of cryptocurrency from a Singapore-based crypto exchange, KuCoin. The largest recorded hacking incident occurred in August 2021, when $610 million disappeared from the DeFi Poly Network site. However, most of this amount was refunded by the hacker in the same month.

The second largest hack occurred on March 23, 2022, when $540 million worth of cryptocurrency was stolen from the Ronin blockchain project.

In addition, the hack has led to the collapse of exchanges such as Mt Gox in Japan.

And unlike stolen real currency that can be controlled by freezing the thief’s accounts, stolen cryptocurrencies pose another hurdle for law enforcement: it’s 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 the cryptocurrency platform Indexed Finance and disappeared. Although he knows who he is, nothing concrete could be done.

scam

A June 3, 2022 report from the U.S. Federal Trade Commission (FTC) found that more than 46,000 people said they lost more than $1 billion in crypto to scams between January 1, 2021 and March 31, 2022. That was more than any other payment method, the FTC noted. † The US government agency also found that 70% of the scams involved Bitcoin, and that more than half of all scams came from a malicious ad, post or social media message.

Losing or forgetting the private key, a secret number that resembles a password, can also be a major problem for investors. Since the private key cannot be recovered, forgetting it means that the money in an account may never be realized. Private keys can also be stolen by hackers if they are present 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 mainstream means of payment. As a result, there is a sustained demand for cryptocurrency insurance, forcing some leading insurers to take their first steps in this segment of the policy market.

Insurance policy
Image: Courtesy of Vlad Deep/@vladdeep/Unsplash

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 to reimburse officers for costs incurred in lawsuits or investigations.

In May 2022, British start-up Superscript, a licensed broker under Lloyd’s, launched Daylight – crypto loss 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 its first coverage under Daylight will be technology liability and cyber insurance, highlighting the serious threats that hacks and scams pose to the blockchain.

The exhibitor further stated that the first covers protect companies from a range of risks, including ransomware attacks, cyber business interruption and professional negligence. Coverage will be provided for directors and officers, guardianship and minors.

An interesting policy was introduced by Lloyd’s in February 2020, through its syndicate Atrium in partnership 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 coverage is designed to insure cryptocurrency in online wallets and starts from 1,000 GBP (1,212 USD, on June 16, 2022).

“This is a new type of liability insurance with a dynamic limit that rises or falls based on changes in the price of crypto assets. This means that policyholders are always compensated for the underlying value of their assets under management, even if this fluctuates during the insurance period,” Lloyd’s said in the statement accompanying the policy announcement.

While there are few players in the market that insure against the loss of cryptocurrency, most existing policies are aimed at businesses that need crypto and not at customers.

(Main and Featured Images: Kanchanara/@kanchanara/Unsplash)

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