Many crypto exchanges and custodians have been unable to obtain insurance over the years or have shyed away from obtaining it due to high premiums stemming from the lack of insurers willing to hedge the risk of the industry. Some of the larger exchanges have instead opted to insure themselves.
But that is slowly changing, as the traditionally risk-averse insurance industry—from big brokers to new startups—founded new teams focused on cryptocurrencies, hoping to profit from the industry’s rapid growth. By dipping his toes in the water.
“Previously, there was no such demand that we are seeing now, and over the last six months of last year, there has been a real increase in demand from our customers to better understand this space and be able to manage risk. space,” said Luke Speight, who last month became director of a newly created digital asset team at insurance broker and consulting firm WTW, formerly known as Willis Towers Watson.
UK startup and London-based Lloyds licensed broker Superscript earlier this month launched a crypto insurance product called Daylight that will cover technology liability and cyber insurance, the company said. It plans to expand coverage this year to include directors and officers, custodianship and crypto mining.
This change came as the crypto market saw another wave of turmoil in recent weeks, a reminder of the highly volatile nature of an industry that still lacks significant oversight and investor protection. More than $1 trillion in digital currency has disappeared since November, as traders shy away from risky investments amid rising interest rates and high inflation.
The demand for digital asset insurance also represents a step in the growth of the crypto industry, with early proponents often doubting Wall Street’s establishment and government regulations. The industry grapples with increasing regulatory scrutiny while seeking ways to gain credibility with the public and investors and attract more mainstream adoption.
Crypto firms usually seek to insure against the loss of funds held by exchanges on behalf of clients in case of incidents such as outside theft and employee theft. They also often carry directors and officers insurance that protects officers and companies from costs related to investigation or litigation, as well as cybersecurity insurance against hacks and professional liability insurance to protect against claims of negligence.
Having insurance coverage also gives crypto firms lending and exchanges wider credibility. Unlike most industries, some of the most popular crypto exchanges such as Coinbase Global Inc., Gemini Trust Company, Bittrex Inc. and Crypto.com have publicly announced that they have hundreds of millions of dollars in digital asset insurance.
According to James Knox, a regional technology practice leader at professional services firm AON plc, regulatory uncertainty around the cryptocurrency industry and several high-profile, significant crypto thefts have driven insurers into the crypto world. He added that for potential insurers, the recent news of crypto losses “has had a chilling effect.” Although some insurers, mostly based in London or Bermuda, are taking on the risk, many insurance companies are still not comfortable with the risk involved in insuring crypto firms, he said.
Gemini said it offers $300 million in insurance for assets on behalf of customers, covering theft, security breaches and fraudulent transfers, a spokesperson said. The exchange, which worked with insurance broker Marsh & McLennan Cos, said it has shown insurance companies that it offers “a safe and secure exchange and custodian”. , the spokesman said.
“Crypto evolved out of not wanting rules and compliance, but realizing they gain the credibility of users, which in the past was a bit burned out, requiring some balance of compliance and rules, as this industry grows,” said leader Rosie. Said, co-founder and chief technology officer of Parametrics Insurance, which covers businesses against technology downtime.
New York-based Parametrics began tailoring its products to the crypto industry earlier this year, providing insurance to help crypto firms mitigate financial risks during cloud outages. The demand for cloud insurance has surged across crypto exchanges after traders and investors filed multiple lawsuits seeking millions of dollars in outage-related damages. The cost of a parametrics policy varies depending on the size of the firm and its cloud infrastructure, but annual premiums can range from $10,000 to $500,000 or more.
One reason premiums remain high is that crypto is still a nascent industry that lacks an adequate record of claims to accurately measure risks, while insurers have limited understanding of how the blockchain technology behind cryptocurrency works, industry participants said. Told.
George Pesok, chief legal officer of crypto-based non-profit HBAR Foundation, said when he recently looked into insurance for the organization there were few options. The same was true when looking for a former employer, Tassen Inc., he said.
Many crypto firms, such as token issuers, are considered high risk by insurers, Mr Pesok said, as they face frequent inquiries from regulators that are voluntary but can quickly turn into formal investigations. “They either don’t want to cover it, and they create exclusions for token issuers knowing this, or they will cover it and charge an extraordinary amount for it,” he said.
Still, it is beneficial for a crypto firm to have a D&O insurance policy, as it is useful for attracting new directors and officers to the company, he said.
One insurer operating in the cryptocurrency sector is Hamilton, Bermuda-based Relam Insurance Limited. The firm, founded three years ago, has underwritten crypto mining operations, large exchanges, asset managers and remittance firms around the world, according to Joseph Ziolkowski, co-founder and chief executive. Rilm is digging into the details of each account before underwriting each crypto firm, without insurers having data on the damages they would inflict on traditional industries.
“If we can’t say, for example, that all exchanges are good risk, then we need to find exchanges that actually represent a good risk and the only way to do that is through a diligent underwriting and do-it-yourselfer. Diligence is the process. To arrive at a decision on whether to provide coverage or not,” he said. Mr Ziolkowski said his firm asks crypto businesses to provide current audited financial statements, valuations, entity organization charts and the latest investor deck, among other items, in its underwriting process.
According to Mr. Knox of Aon, other factors insurers look at in their decision to provide coverage is whether the crypto firm has strong anti-money-laundering and know-your-customer procedures and internal controls.
“Insurance brokers need to be more innovative than ever in dealing with the cryptocurrency industry, and the crypto industry is developing rapidly and strongly,” he added. “Insurance brokers and companies have to be very nimble and innovative to look at. The best interests of their clients.”