Thirteen years after the mining of the bitcoin genesis block, an entire ecosystem of cryptocurrency products and services have risen to assist the growth trajectory of the nascent crypto industry. One of the challenges to growth and mainstream acceptability has been the highly volatile and risky nature of cryptocurrencies. Since investors must trade at their own risk, without the benefit of insurance products to protect them from losses, many would-be investors have had to watch from the sidelines. That could soon change.
In the larger financial world, financial customers expect to do business with federally insured financial institutions. Banks have FDIC, the Federal Deposit Insurance Corporation. Since 1933, the agency has insured bank deposits backed by the strength of the U.S. government.
Credit unions have their own insurance agency.
Until recently, insurance companies wouldn’t consider crypto exchanges, crypto mining operations, and other decentralized finance services. But that’s changing.
What Factors Are Leading to Crypto Insurance?
There are several reasons crypto companies, and their customers, can benefit from crypto insurance. First, the increased scrutiny of government agencies and the looming regulation they face make insurance a necessity. What happens if the Securities and Exchange Commission determines that Coinbase, for example, is peddling unregulated securities and issues a hefty fine? It’s happened before and it could happen again.
Paying fines like those imposed on Poloniex and BlockFi could hinder a crypto lending service or exchange from covering calls and mass exits. Remaining liquid is imperative.
Another threat to crypto investors, traders, and lenders is asset security. The Federal Trade Commission has discovered that crypto investors have lost $1 billion due to security scams since 2021. Last year set a new record for crypto attacks with a total of $12 billion lost to hacks and fraud. These numbers will only grow larger, and crypto custodians without insurance lose credibility with potential clients. The larger crypto exchanges, such as Coinbase and Gemini, have had to provide their own digital asset insurance.
Gemini, for example, offers $300 million in insurance for assets it holds for customers.
Another reason crypto firms need insurance is to cover down times when technology fails. Parametrix, for instance, has coverage for cloud outages. Corporate officers need Directors & Officers (D&O) liability insurance to protect them in the event of a lawsuit. In a litigious society, that’s a necessity for any corporation, but it’s very important for crypto companies because many newer investors may not realize the extent of their risk and when they suffer major losses will attempt to regain those losses through litigation.
Any way you slice it, crypto companies need insurance. Thankfully, there are now a bevy of insurance providers ready and willing to offer it to them.
The Challenges to Crypto Firms Being Property Insured
Historically, the challenges for crypto firms being property insured was lack of insurance products available to them. Insurance companies are in the risk mitigation business and simply weren’t willing to provide insurance for products they didn’t understand, and which carried inherent risk. While that has changed and there are now several insurance companies willing to provide insurance, there are tradeoffs.
Crypto firms are required by their insurance carriers to understand their customers. That means employing anti-money laundering and know-your-customer onboarding procedures, practices the industry was philosophically against a decade ago.
Another big challenge is the price of the policies. Risk mitigation requires putting a price on the risk. Since cryptocurrencies are inherently risky digital assets, partly because of their high volatility but also because of the lack of regulation, that means available insurance products are expensive. They could be pricing out smaller crypto exchanges, crypto lending services, and crypto mining operations resulting in market favorability for larger firms.
A third challenge is the dearth of crypto insurance products on the market. In many cases, this leads to insurance tailored for each client. That further adds to the cost.
The bright side is that insurance products make the customer feel safer. That additional security could lead to wider adoption as we enter the next market phase.