Crypto Insurance

Insurance covers damage inflicted by unpredictable events, and cryptocurrency insurance is no different. Highly volatile cryptocurrency often makes headlines as the target of multimillion-dollar hacks, leading to investors losing millions and the sector shedding billions. Among the high-profile thefts include hackers who stole about $615 million from a blockchain project connected to the popular game Axie Infinity, and $23.3 million from Ronin, a network that facilitates the transfer of crypto coins across different blockchains, according to Reuters.

In its 2022 Crypto Crime Report, Chainalysis noted that "cryptocurrency-based crime hit a new all-time high in 2021, with illicit addresses receiving $14 billion during the course of the year, up from $7.8 billion in 2020."

Key Takeaways

  • As the popularity of cryptocurrency has soared, so has the theft of those funds, to the tune of $14 billion in 2021.
  • Insurers are tiptoeing into the field to offer limited crypto insurance that covers some situations but not all.
  • To be fully covered, crypto investors may want to consider various insurance policies, which can be costly.

Unlike fiat currencies such as the U.S. dollar, the euro, or the Mexican peso, cryptocurrencies are not backed by governments, and there is no protection baked in to stop theft or loss of those funds. The U.S. Federal Insurance Deposit Corporation (FDIC) protects banks and thrifts from up to $250,000 in losses. However, no such protection exists for cryptocurrency.

The Crypto Crime Wave

To counter that crypto crime wave, exchanges such as Binance and Coinbase claim to insure the digital funds of investors who are victims of theft. But that won't help you if you're forced to give up your passwords and credentials in an extortion scheme.

"Coinbase carries crime insurance that protects a portion of digital assets held across our storage systems against losses from theft, including cybersecurity breaches. However, our policy does not cover any losses resulting from unauthorized access to your personal Coinbase or Coinbase Pro account(s) due to a breach or loss of your credentials," according to its site.

In 2018, Binance established the Secured Asset Fund for Users (SAFU) to protect users' funds, in which it committed a portion of trading funds. In 2019, Binance lost $40 million in a hack, which the company claimed did not affect investors. The company says its SAFU paid for the loss.

To make up for some of the stolen balance, the fledgling sector of cryptocurrency insurance companies may cover some losses connected with cybersecurity breaches and thefts, but neither investors nor exchanges will get all their funds back. What the policies generally don't cover are losses from fluctuations in the crypto market or if an investor gets involved in a get-rich-quick scenario that turns out to be a Ponzi scheme, in which all or some of the investment is lost. It also does not cover direct hardware loss and damage and transfer of cryptocurrency to a third party or protect against disruption or failure of the blockchain underlying the asset.

In the event of crypto exchange bankruptcy, insurance is less helpful. Customers with custodially held assets are last in line to receive any payments. To protect your funds, consider a non-custodial wallet for which you own the private keys.

A Handful of Crypto Insurers

Companies such as Lloyd's and Relm Insurance are sliding into the crypto insurance game. Some insurers cover only crypto exchanges because that's where the large balances of crypto funds reside.

Though not an insurance company per se, Coincover does offer an individual protection technology and software solution that attempts to prevent crypto businesses from losing crypto due to theft or human error. It covers digital assets against hacking, phishing, malware, device theft, Trojan software, and brute force attacks. The company claims its technology enables the company to compensate for when something goes wrong.

Lloyd's has written a "small number of policies in recent years for cryptocurrencies," according to Elliot Maule, a senior manager in regional communications at Lloyd's. He added, "Since this is a new and rapidly evolving area, Lloyd's does require syndicates to proceed with caution and additional underwriting scrutiny."

Recent crypto insurance initiatives from Lloyd's include the launch in 2021 of a new insurance policy, Lloyd's Product Launchpad, to protect cryptocurrency held in online wallets against theft or a malicious hack. As of June 20, 2022, the crypto firm BitGo offers a $250 million policy that covers digital assets wherever it holds private keys. The policy covers losses in the event of the copying and theft of private keys, insider theft, dishonest acts by BitGo employees, or executives' loss of keys. BitGo's insurance is provided by Lloyd's Syndicate.

Lloyd's also introduced the first-of-its-kind liability policy with "with flexible limits from as little as 1,000 pounds [$1,226] created by Lloyd's syndicate Atrium in conjunction with Coincover to protect against losses arising from the theft of cryptocurrency held in online, hot wallets," added Maule.

Insurers' Policies Are Lacking

The insurance industry has a ways to go before it can offer solid, affordable policies that will reimburse lost crypto investments for individuals. Per an article from ZenGo, "The main problem with crypto insurance offerings is that they are not fully comprehensive. For crypto holders to fully protect all of their crypto assets, they must mix and match among several different plans. They would need one plan to protect against private key loss and another for protection against smart contract faults. They might need a third to protect themselves if their wallet company ever went out of business."

What Are the Risks of Investing in Cryptocurrency?

Investing in cryptocurrency is risky. The prices of even the most established cryptocurrencies are much more volatile than the prices of other assets such as stocks. The prices of cryptocurrencies in the future could also be affected by regulatory changes, with the possibility that cryptocurrency could become worthless. Cryptocurrency funds are also subject to cybersecurity risks including hacking and theft.

Are Cryptocurrency Accounts Protected by the FDIC?

No. Although the U.S. Federal Insurance Deposit Corporation (FDIC) protects regular checking and savings accounts against losses of up to $250,000, no such protection exists for cryptocurrency.

Is It Possible to Purchase Insurance for Cryptocurrency Investments?

Some insurance companies are offering policies that provide limited coverage against the theft of cryptocurrency funds. However, the insurance policies that are available provide reimbursements for stolen cryptocurrency funds only in certain situations. The policies generally don't cover losses from fluctuations in the crypto market. They often do not protect against direct hardware loss and damage, the transfer of cryptocurrency to a third party, or the disruption or failure of the blockchain underlying the asset. To obtain more complete coverage, crypto investors would likely need to buy multiple insurance policies.

Article Sources
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  1. Reuters. "Factbox: Crypto's Biggest Hacks and Heists."

  2. Chainalysis. "Crypto Crime Trends for 2022: Illicit Transaction Activity Reaches All-Time High in Value, All-Time Low in Share of All Cryptocurrency Activity."

  3. Federal Deposit Insurance Corporation. "Your Insured Deposits."

  4. Coinbase. "How Is Coinbase Insured?"

  5. Binance-Academy. "Secure Asset Fund for Users (SAFU)."

  6. CoinDesk. "Binance Considered Pushing for Bitcoin 'Rollback' Following $40 Million Hack."

  7. Policy Advice. "Crypto Insurance: What Is Crypto Insurance, and How Does It Work?"

  8. Coincover. "Our Cryptocurrency Products."

  9. Lloyd's. "Lloyd's Product Launchpad."

  10. BitGo. "Digital Asset Insurance."

  11. Lloyd's. "Lloyd's Launces New Cryptocurrency Wallet Insurance Solution for Coincover."

  12. ZenGo. "Are You Really Insured by Crypto Insurance?"

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