Insurance coverage

Digital Asset Insurance Coverage Series Part 5: How Businesses and Consumers Facing Cryptocurrency Risk Approach Insurance

Last week’s discussion focused on the evolution of the insurance market for digital assets. This section focuses on the market as it currently exists, providing examples of products purchased by businesses and consumers facing cryptocurrency risks.

Cryptocurrency theft is not an abstract concept. As Bloomberg reported in January 2022, “ said customer accounts holding approximately $34 million in cryptocurrency and cash were impacted by unauthorized withdrawals. The Pirates grasped over $80 million in digital assets from a blockchain extension by Qubit Finance last week.[1] And unlike bank accounts which are insured by the FDIC for amounts up to $250,000 per account, this insurance is currently limited to sums of money (to know., legal tender) in checking, savings and money market accounts at banks and does not extend to cryptocurrency holdings.[2]

As in any market, some companies are fully self-insured (or naked), some are partially self-insured and some have considerable amounts of insurance although the nature, scope and amount vary considerably.

Some of the major exchanges and custody providers reportedly have policies with limits over $100 million.

For example, Coinbase reportedly has a $255 million criminal policy available for losses incurred due to platform-wide breaches,[3] warning investors in bold print that its Crime Policy “does not cover losses resulting from unauthorized access to your personal Coinbase account due to breach or loss of your credentials.”[4]

Bitstamp insures the assets held in the BitGo and Copper wallets it uses (95% of its stored digital assets are in cold storage).[5] This is complemented by a $300 million criminal policy issued by Lloyd’s and other companies which “applies to digital assets held on Bitstamp offline or online and covers a range of crime-related matters. These- these include employee theft, loss while assets are stored at any location, loss in transit, loss caused by computer fraud or funds transfer fraud, and loss related to fees and legal expenses.[6]

Meanwhile, Blockfi has theft insurance through its Gemini custodial wallet.[7]

In addition to insurance policies that provide crime coverage, major exchanges may also seek to transfer or mitigate their risk through other options. Some, like Gatehub, offer insurance via wallets, with customers having the option of insuring some or all of the content.[8] Others allegedly diverted 10% of all trading fees to a self-directed fund. For example, earlier this year, Binance Holdings Ltd. said it had been earmarking funds since 2018 and had amassed a $1 billion “insurance” fund for its users.[9]

The decision to obtain insurance or determine the appropriate coverage may vary depending on how coins and wallets are stored. Some companies only cover “cold storage” because the parts are kept offline and pose less risk of hacking. Other companies offer insurance for “hot” or “hot” storage (recognizing that online storage creates increasing levels of exposure and threat of potential hacking).

Historically, most cryptocurrency insurance products were not aimed at consumers (that’s to say., individual traders). In early 2022, however, Breach Insurance Company announced the launch of a “Crypto Shield” product which would be the first insurance product for crypto investors.[10] This theft insurance, available in select states, covers the hacking of more than 20 types of cryptocurrencies for customers using Binance US, Coinbase, CoinList and Gemini.

Coincover provides security services and limited coverage to people holding assets in nearly 20 wallets and exchanges, including, FTX, and Coinbase.[11] It covers, among other things, digital currency theft resulting from a security breach or acknowledgment, employee theft or fraudulent transfer, with an insurance guarantee from Lloyds for loss of access or stolen funds. Coincover policies may provide a “dynamic limit” which increases/decreases based on cryptocurrency price fluctuations. “Standard” plans ($159 per year) offer up to $10,000 of coverage for lost or hacked funds from multiple wallets, with a more expensive “Pro” plan offering $100,000 coverage ($749/year) for more wallets with higher levels of protection available upon request.

Bitgo also provides information on its website.[12] He obtained a $250 million policy through Lloyd’s and other European companies covering digital assets “where the private keys are 100% owned by BitGo Trust Company or BitGo, Inc. in the event of: copying and theft of private keys, insider theft or dishonest acts committed by employees or officers of BitGo, [and] Loss of keys. »[13] This insurance is provided free of charge to Bitgo customers who can purchase additional insurance if needed.

In deciding whether or not to take out a new line of insurance and setting the terms of cover, insurers seek as much certainty as possible, taking into account similar risks to facilitate modeling and the availability of a robust set of regulations. /rules. In this latter regard, future guidance and clarity from the SEC and the Office of Comptroller and Currency could be helpful in the underwriting process.

As seen, insurance products have been and continue to be developed to cover cryptocurrency assets. There are several reasons to consider purchasing this insurance. It can serve the traditional objective of reducing exposure through risk transfer. Insurer experience can help with risk assessment/mitigation (although this may require audits and background checks). And it can help the company market the availability of insurance by increasing the comfort level of the customer.

It is a truism in insurance underwriting that the level of threat or risk materially and directly influences the cost; as one increases, the other also increases.

Applying this concept here, the premiums associated with cryptocurrency hedging are higher than for non-cryptocurrency hedging. For example, an early article stated that $10 million of cryptocurrency theft coverage could cost 2% of limits, compared to 1% or less for traditional claims.[14] More recently, FIT Small Business reported in December 2019 that if a standard crime insurance policy costs less than 0.5% of covered assets, cold storage premiums can be in the range of 0.8%. at 1.2% and hot storage premiums of around 3-5%.

This is the fifth post in the blog’s Digital Asset Insurance Coverage series.

This article is an excerpt from an article written by Scott DeVries, Jessica Cohen-Nowak and Adriana Perez that originally appeared in the Journal on Emerging Issues in Litigation published by Fastcase Full Court Press, Volume 2, Number 4 (Fall 2022), p. 255 – 276 (a full list of all references is provided in the published version of the review).