Deciphering crypto insurance

Deciphering crypto insurance

Over the past few weeks, we have heard a lot of news about the rise and fall of bitcoin, a particular type of cryptocurrency. It is probably timely to explore, where exactly are we now in crypto insurance? The potential for large gains to be made in crypto-assets has attracted investors and also criminals after assets stored in crypto wallets in a $2.48 trillion market.

What is crypto insurance?

Crypto insurance is a new class of insurance coverage so its boundaries are still being defined. However, some products currently available insure against cryptocurrency loss or theft. This may be theft from cold storage (eg. physical theft or loss of hard drive) or hot storage (eg. online wallet).

Cryptocurrency insurance is still an emerging area and there is no consistent regulation of cryptocurrency across jurisdictions. It is often not as simple as treating cryptocurrency as cash.

Australia’s securities regulator has recently begun consultation on proposed regulation of crypto-asset based exchange traded products. However, the consultation will not look at the legal characterisation of crypto; that is being considered by the Senate Select Committee on Financial Technology and Regulatory Technology.

Big losses, but big opportunity?

The past few years have seen some significant cryptocurrency heists, underscoring the demand for crypto insurance. Here are some high profile ones:

  • Mt Gox Exchange (Tokyo) announced in Nov 2014: $450 million
  • Coincheck (South Korea) in Jan 2018: $534 million
  • Bithumb exchange (South Korea) in June 2019: $31.5 million stolen in digital tokens
  • in April 2020: $25 million stolen but hackers returned the money after it turned out it may have inadvertently disclosed its IP address.

To insure or not, that is the question.

Understandably, insurers are treading cautiously. Given the volatility of cryptocurrencies and lack of regulation across multiple jurisdictions, insurers have been nervous about insuring it although demand for crypto insurance is reportedly high. The cryptocurrency market is reportedly worth $2.48 trillion.

While some new players have sprung up in recent years like Lloyd’s syndicate Atrium in conjunction with Coincover, capacity is also tight because of a less than desirable interest in the reinsurance market. There are some solutions to this problem, like Nayms, where crypto currency investors can re-insure crypto risk, and crypto-insurance brokers can find capacity for proposed risks to be insured.

The future

The cryptocurrency market presents some unique opportunities and challenges to insurers, not least because of its volatility. Given this, it is no surprise that traditional insurance policies may not be well suited for this type of risk and new products and even marketplaces are now emerging.

Tim Chan is an insurance & insurtech lawyer at global law firm Norton Rose Fulbright and Founder of The InsurTech Lawyer blog. He regularly advises insurers and startups on emerging legal issues affecting the industry. Follow Tim on Twitter: @timinsydney