Published Jun 27, 2022
By Qredo Team
Why crypto needs insurance
Insurance is one of the engine rooms of the global economy.
The industry, used by most and given its due credit by few, underlies business as we know it, transferring the risk of catastrophic failures or unforeseen events into a separate market.
That market forms the backbone of everything, from the ability of drivers to move from one place to another without fear that the actions of another will cause significant financial loss, to helping multinational businesses weather natural disasters.
In many cases, it is compulsory to have insurance cover. And where it isn’t required, it is highly advisable to have it anyway.
But how do you cover an industry like crypto?
For the digital asset market, insurance has proved something of a conundrum. As the sector has surged in value, the need for coverage has grown, but it has not proven easy.
The thing is, insurers rely on historical data and some form of comprehensive risk analysis to provide reasonably-priced coverage.
As a completely new economic paradigm, crypto can’t provide that.
Throw into the mix the lack of regulation around the sector, and fears of getting wrapped up in illicit activity, and you can see why the options available to the market have not kept up with its growing role in the economy.
However, things are beginning to change. As crypto matures and integrates more with the wider business world, more insurers are beginning to offer the type of coverage the market needs.
And DeFi native firms have come up with their own ways of providing cover, innovating in this segment of the cryptoasset world just as much as in other parts of the market.
So, how does crypto insurance work, and can you insure bitcoin, ether and other cryptoassets?
The development of crypto insurance
The problem of obtaining sufficiently large and reasonably priced insurance coverage has dogged the cryptoasset market for some time.
Back in the early days of the sector, insurance for crypto was to all intents and purposes unavailable; with the risks of total loss and incidents such as the collapse of the Mt Gox exchange in 2013, many insurers were put off from getting involved in crypto.
Eventually though, the opportunity and demand became too big to ignore.
Initially, commercially available insurance coverage mainly focused on cold storage.
With hot wallets connected to the blockchain, and exchanges deemed to be vulnerable to theft or manipulation, insurers only felt comfortable offering firms cover which was in their opinion secure, treated in a similar fashion to storing gold in a vault.
Why does crypto need insurance?
For crypto to become open to a broader audience, the reassurance of insurance is a key stepping stone.
Investors such as large institutions will not do business with firms which lack sufficient insurance coverage.
That applies to mainstream businesses as well, but is even more pertinent when it comes to cryptoassets.
If the pension managers, hedge funds and private equity firms are to put their millions to work in the market, they need to do so safe in the knowledge that should things come to the worst, there is a sufficient insurance package in place to protect their assets.
Similarly for retail users, you want to be certain that in the event an exchange or other provider is faced with an outage or other adverse unseen circumstance your assets will be covered.
How does crypto insurance work?
We can split crypto insurance into two separate camps:
DeFi native platforms such as DAOs and mutuals
Commercial insurance coverage through markets such as Lloyd’s of London
There are numerous DeFi-native insurers who provide coverage for incidents such as smart contract failure denominated in cryptoassets.
Often these types of coverage utilize smart contracts and other crypto-based architectures to provide that cover, meaning that the premiums are calculated and claims distributed automatically using information from the blockchain.
For commercial insurance coverage at platforms such as Lloyd’s of London and others, the type and amount of insurance available varies depending on the company.
As of yet there are no industry-wide standards around wordings of policies or even to which segment of the market crypto cover belongs.
Sometimes the cover will be offered as ‘specie’ coverage, which is the insurance market used to cover high-value, portable items like diamonds, fine art or bullion.
With others, it can fall under cyber insurance underwriters, the insurance sub sector dedicated to covering risks such as hacks and ransomware, or even be covered under straight theft policies.
The limits of coverage on offer, and the premium paid, can vary widely, given that the market is still in development and demand far exceeds available supply.
Do I need crypto insurance cover?
The short answer here is yes- absolutely.
Anything of significant value to you is worth securing insurance coverage for. Given the amount of value locked into the crypto ecosystem, it is well worth scoping out your options for coverage – even if you are simply an individual investor.
As an exchange, trading firm or custody provider such as Qredo, insurance is one of the key value propositions which can unlock the potential of institutional investment in crypto.
Crypto insurance coverage helps mitigate against losses, but it also paints a more responsible, secure picture to regulators, many of whom are concerned about the potential for scams and unsecured losses in the market.
As cryptoassets are currently not covered by programs like the US Federal Deposit Insurance Corporation which provides backstops against the losses of bank deposits, private market insurance is needed to fill that void.
Can you insure cryptocurrency?
The good news is we have come a long way from the early days of crypto insurance where coverage was either nonexistent or only available at eye-watering premium levels.
More and more commercial insurance providers are beginning to offer crypto insurance coverage, and the market is likely to continue to grow significantly in the near future.
There are also a host of crypto-native platforms on the market, which can offer protection against loss of keys, physical damage or theft, and third-party claims.