An insurance policy is a contract that protects a person, family, or business from specific hazards. It is a legally binding agreement between a policy holder and provider that financially secures the holder against specific perils.
Homes, cars, crops and personal health are a few items that people commonly wish to protect against the unknown. In order to accomplish this goal, an individual will take out an insurance policy to insulate themselves against foreseen and unforeseen risks. The underwriting of such policies is conducted by insurance companies such as State Farm, AIG and UnitedHealth Group Inc.
One of the newer and relatively exotic forms of insurance are policies designed to protect cryptocurrency. Known as crypto insurance, these contracts offer crypto traders and investors a layer of insulation against a collection of unique threats.
What Is Cryptocurrency Insurance?
Crypto insurance is a policy that covers losses related to cryptocurrency theft. Such policies may be carried at the exchange, wallet or personal level. Each is unique and designed to meet the holder's specific needs.
However, all crypto insurance policies are related to the evolving value of the underlying asset, not initial investment value. In this way, crypto traders and investors are not protected against market volatility and potential loss.
Crypto insurance functions much as any type of insurance does. Contract definitions are largely the same as car or home insurance. Here are a few key terms and their meanings:
- Holders: Holders are the buyers of the contract. Crypto investors and crypto businesses are the holders of crypto insurance policies.
- Providers: Insurance providers offer coverage. In the event of cybercrime, crypto insurance providers compensate holders for specified losses.
- Coverage: Coverage is the amount of realised damages to be paid by the contract provider to the holder. For crypto, it is the compensation one receives in instances of cyberattacks or cybersecurity breaches.
- Premiums: Crypto insurance premiums are the costs of the policies in question. Premiums vary according to holder, amount and degree of risk.
- Deductible: The policy deductible is an amount of loss that is not covered by the policy. It is a percentage of the contract's aggregate coverage.
Although crypto insurance is a new arena, insurance is not. And even though it's not well established, cryptocurrency insurance functions much the same way as conventional car, home or health insurance. In the event of undue loss, insurance providers compensate contract holders for a portion of their loss. To secure this coverage, the holder pays a premium and is responsible for the deductible.
What Are The Different Types Of Crypto Insurance?
Let's now take a look at the types of crypto insurance available to consumers.
At crypto exchanges, digital assets are protected by policies facing cybercrime. For instance, mega-exchange Coinbase carries insurance designed to secure crypto from hacking and theft. According to the Coinbase website:
"Coinbase carries crime insurance that protects a portion of digital assets held across our storage systems against loss from theft, including cybersecurity breaches."
Although customers enjoy some degree of protection, Coinbase is clear about policy limitations:
"Our policy does not cover any losses resulting from unauthorized access to personal Coinbase or Coinbase Pro account(s) due to a breach or loss of your credentials."
Also, exchanges do not enjoy governmental backing as crypto is not legal tender. Thus, client accounts are not automatically covered by bodies such as the Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SPIC).
Ultimately, exchange-held crypto insurance may not cover the entirety of client losses. Coinbase explicitly spells this out in an insurance disclaimer:
"In case of a covered security event, we will endeavor to make you whole. However, total losses may exceed insurance recoveries so your funds may still be lost."
Much like crypto exchanges, online wallets often carry insurance to provide their customers with peace of mind. However, much like the exchanges, client funds are not 100% protected in the case of hacks or other cybercrime.
Insurance-backed wallets commission the services of a third-party policy provider. One of the first insurance companies to enter this space was Lloyd's of London. In February 2020, Lloyd's worked with syndicates Atrium and Coincover to launch crypto wallet insurance. Policies started with flexible limits from £1,000 and were intended to insulate wallet holders from cybercrime.
Lloyd's Head of Innovation Trevor Maynard said the following about Lloyd's wallet insurance solutions:
"As more money flows into the crypto asset market, losses from hacks are on the rise. Nevertheless, cryptocurrency companies have found ways to protect their digital assets from theft and, by working closely with Lloyd's underwriters, to insure losses that do slip through the net."
Wallet insurance furnishes crypto holders with a few benefits:
- Insurance-backed wallets offer protection against counterparty risk. If a wallet provider becomes insolvent, a portion of customer funds are protected.
- Coverage is typically complimentary for clients.
- Account holders remain in control of their private keys and recovery phrases.
Personal Crypto Policies
Given the ambiguous and incomplete nature of exchange-based crypto insurance, many individuals are inclined to seek personal coverage from a separate vendor. If one is a serious crypto trader or investor, this is certainly a logical step.
Personal cryptocurrency insurance is designed to secure an individual's holdings. It is a policy that compensates the holder for losses related to cybercrime and crypto theft.
As of this writing (August 2022), the private crypto insurance environment remains in its infancy. Few companies are offering this type of coverage and policies are limited. One provider is Boston-based firm Breach Insurance. Here's look at what a personal policy through Breach may entail:
- 20 types of coins are supported, including Bitcoin (BTC), Ethereum (ETH) and Dogecoin (DOGE).
- Crypto assets must be held at an approved exchange such as Coinbase or Binance.
- Coverages range from US$2,000 to US$1 million.
- Deductibles are 5%, 10%, or 15% of the policy amount.
Breach's personal crypto insurance policies are among the first in the decentralised finance (DeFi) industry. Nonetheless, as the cryptocurrency market continues to expand, it is likely that the demand for policies facing digital currencies will grow. In the coming years, it's not unreasonable to believe that the private crypto insurance market will expand dramatically.
Is Crypto Insurance Necessary?
Since 2020, the cryptocurrency market has grown exponentially. The launch of countless ICOs, NFTs and new blockchain networks has brought the asset class mainstream. In the process, many coins have experienced a robust growth in value. For instance, Bitcoin (BTC) rallied from US$7,160 on 1 January 2020 to US$23,287 on 1 August 2022.
Rise Of Cybercrime
The expansion of the crypto market capitalisation has certainly increased the presence of cybercrime. Through the first seven months of 2022, hackers made off with US$1.4 billion worth of digital assets using crypto bridges alone. This is a staggering figure that has negatively impacted thousands of investors.
Crypto Lender Insolvency
Aside from hacks, 2022 brought insolvency cases for several crypto purveyors. One of the largest was Celsius, which filed for bankruptcy in July 2022. The crypto lender saw its value plummet from US$25 billion to US$167 amid a dramatic cryptocurrency selloff. Ultimately, Celsius became insolvent and unable to honour client deposits and holdings.
Considering the prevalence of hacking and the impact of crypto volatility on wallets, lenders and exchanges, there is a need for cryptocurrency insurance. Although safeguards are in place at the exchange and wallet levels, investors are well-advised to investigate the scope of their coverage.
Cryptocurrency insurance insulates crypto investors from losses related to hacking, security breaches and other cybercrime. It may be in place at crypto exchanges, crypto wallets and at the personal level. Companies such as Lloyd's of London, Coincover and Breach are a few of the industry's custodians.
Crypto insurance functions in a similar fashion as conventional insurance. The contract holder pays a premium for a desired amount of coverage. In the event of loss, the insurance provider compensates the holder for a portion of the loss.
It's important to remember that digital currencies are not regulated or backed by governmental facilities. Thus, investors are not covered by national insurers such as the FDIC or SIPC. This places an impetus upon insurance at the exchange, wallet and personal levels.
As of August 2022, the availability of personal crypto insurance remains limited. However, the industry is likely to expand in the event of widespread crypto adoption and coin value appreciation. At that time, it will be up to the individual crypto trader and investor whether purchasing such policies is a suitable course of action.
FXCM Research Team
FXCM Research Team consists of a number of FXCM's Market and Product Specialists.
Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.
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