Crypto: creating an insurable environment

As cryptocurrency becomes more mainstream, we look at the nuances of insuring cryptoassets and ask: is this something insurers want to offer?

Cryptocurrencies have been with us since 2009, when Bitcoin software was made available to the public. 

Initially an outsider technology, crypto has taken significant leaps in its 14 year tenure, from Bitcoin reaching parity with the US dollar in 2011 and surpassing the US$1tn market value mark in 2021 to the birth of decentralised-finance (DeFi) platform Ethereum in 2015. Add to that the institutional backing from legacy banks like Morgan Stanley and tech firms – including China’s Meitu – to solidify crypto as an asset class, alongside a new EU regulatory framework from 2024, and crypto’s standing seems all but secured. 

However, crypto’s rise has not been without volatility, with celebrity endorsement of Dogecoin from Elon Musk on Saturday Night Live seeing its market worth take huge swings in the space of a few hours in 2021. Earlier issues included the collapse of Japan’s Mt. Gox exchange in 2013 – which was handling 70% of all Bitcoin transactions at the time – and the recent US Securities and Exchange Commission (SEC) filing against XRP (more on this later), both of which paint a mixed picture when it comes to the overall consensus of trust in cryptoassets.

As cryptocurrencies continue to grow and become more mainstream, with their associated baggage of volatility and security risks attached, demand for crypto insurance policies may certainly become more prominent so investors and crypto firms alike can protect their assets. 

Crypto: A risky policy avenue for insurers?

Daniel Seely, Financial Services Regulatory Lawyer for law firm Freeths, says demand in some form of crypto insurance policy “will inevitably grow” alongside cryptocurrencies themselves, but the issue is “whether insurers will be willing to offer it”. 

For Seely, the terms and price that insurers offer crypto coverage are very much up for discussion, and “there are also many nuances that will need careful consideration by insurers and policyholders alike”. This includes “the fluctuating value of cryptoassets (in fiat currency terms), which raises questions about how, in the event of a claim, an insurer values a claim settlement – is the value of the asset set based on the value at the point the policy was purchased, or at the point of the claim?” With this in mind, the growth of crypto insurance seems somewhat stunted by established standard practices and uniformity in what the correct claims valuation process should look like.

Though this may appear as a significant structural obstacle in any potential policyholder growth rate for crypto insurance, Coincover’s Business Unit Director Katharine Wooller feels the growing distribution of ledger technology means crypto claims are now easier to price.

She says: “The real benefit of distributed ledger technology is that the data is freely available and immutable. As the industry has been around in its current guise for around 5 years, there’s now enough data to reliably and cost-effectively price the risk” of owning cryptoassets. 

Wooller states: “Now, there are a variety of insurance-based reg-techs adding real value, both in terms of indemnity insurance and in protecting against hacking, scams and lost access. Unsurprisingly, in some jurisdictions, regulators are making insurance-based solutions a requirement, which will be of long-term benefit to investors and the ecosystem alike.”

Issues extend far beyond crypto

Though a wide-ranging regulatory requirement for crypto insurance is not currently apparent in all global markets, there has, perhaps, been recent cause for the protection of cryptoassets to be made a legal requirement. This is after the SEC sued San Francisco-based Ripple, alleging its XRP cryptocurrency is an unregistered securities offering – or an investment contract “without a contract” – as opposed to a currency. This has damaged the market value of XRP (which you can’t insure against, unfortunately); should the SEC’s case win (the case is ongoing at the time of writing), it would mean XRP investors have placed their funds into an illegitimate cryptoasset. 

Although this example could lead to wider volatility and mistrust in crypto, Seely notes: “The issues surrounding cryptocurrency do suggest that insuring assets is an important decision to make. However, it should be considered that the issues surrounding crypto are not necessarily exclusive to crypto – corporate failings, scams and other such problems can equally affect more ‘standard’ industries and financial markets, as the recent issues with Silicon Valley Bank showed us.”

Wooller echoes this sentiment: “The benefits of insurance extend well beyond individual coins; all digital assets are at risk of hacking, theft and loft access. Many crypto businesses try to ‘self insure’ using their own balance sheet – which, of course, is disastrous in the case of hacks, the recent furore around FTX, and, more importantly, the contagion across the whole crypto industry as a case in point.”

As far as crypto is concerned, Wooller feels there is no excuse for firms not to provide their customers with the protections available due to the number of reputable insurance-based products on the market. 

What needs to change so more insurers offer crypto policies? 

Though there are insurance products for crypto on the market, when will more insurers start to adopt it – or, more pertinently, will they adopt it? 

Seely tells us: “This will depend on what type of customer is being targeted. A standard business that accepts cryptocurrency as a form of payment from customers or suppliers may only have need of a policy that provides protection in the event of any theft of their assets, in the same way that it may provide protection for theft of cash. In such cases, an insurance offering can likely be provided more easily.

“For more sophisticated crypto-focused businesses or markets, the demands and needs may be much more complex, requiring more bespoke policies. In such cases, these businesses will likely need to ensure that they have a sufficiently thorough business plan, setting out their long-term business proposals in detail to allow insurers to make an informed view on the potential risk and provide appropriate terms.”

As a result, Seely feels the crypto industry “needs to make sure that it is not focusing solely ‘on the tech’ but is also producing a more ‘complete’ business package that can deal with matters such as business planning, insurance and compliance”. She goes on to state that “businesses such as these will inevitably appear more favourable to insurers and help provide insurers the comfort they need to be willing to provide appropriate policies to allow the industry to flourish”.

Wooller calls it a “chicken and egg” situation: “The safer the industry can be made, the more appealing it becomes – although, of course, the appetite for insurance grows as the market cap grows. 

“More importantly, the crypto industry needs to appreciate that the more we can grow trust in the ecosystem, the healthier the prices will look; a flywheel to mass adoption cannot be ignored.” 

Whether mass adoption occurs at some point in the future remains to be seen, although if it does, the complexities and nuances of crypto business insurance will likely need to be ironed out – particularly if firms are soon to be required to insure their products as well as consumers needing to ensure their cryptoassets.

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