Can cryptocurrency be insured by something?
As cryptocurrency markets are maturing quickly, they are attracting players from other industries and the insurance industry is one of them.
Cryptocurrency insurance is poised to become a “big opportunity”. World biggest players in the insurance industries are exploring product and coverage options in the space because cryptocurrencies are “becoming more relevant, important, and prevalent on the real economy.”
Why Does The Cryptocurrency Ecosystem Need Insurance?
Currently, the cryptocurrency business, which mostly consists of startups and exchanges, is not big enough to provide substantial revenues for the insurance industry. Based on publicly available information, even North America’s largest cryptocurrency exchange Coinbase holds only 2 percent of its coins insured with Lloyd’s of London. These coins are held in hot storage (or are connected to the Internet). The rest are disconnected from the internet and not much is known about their insurance status.
Insurance for cryptocurrencies becomes important, when you consider the instability of the cryptocurrency ecosystem. The skyrocketing valuation of cryptocurrencies has resulted in massive thefts of online wallets and exchanges. For example, cryptocurrency worth $500 million was stolen from Japanese cryptocurrency exchange Coincheck in January of this year. The cumulative result of these hacks is a vulnerable ecosystem that the mainstream finance ecosystem either ignores or refuses to take seriously.
To be sure, cryotocurrency has always been on the radar of insurance companies. As far back as 2015, Lloyd’s came out with a report listing risk factors for the cryptocurrency. The establishment of recognized security standards for cold (offline) and hot (online) cryptocurrency storage would greatly assist risk management and provision of insurance, the firm wrote. It also mentioned server-side security, cold storage, multi-signature wallets as possible methods to mitigate risk attacks.
A Source Of Revenue
But problems within the cryptocurrency ecosystem could also be a potential source of revenue for the insurance industry. Most insurance products aimed at the industry are bespoke products that have tailored to fit client needs. According to the Bloomberg report, startups and companies operating within the cryptocurrency industry typically opt for theft coverage, which includes cyber insurance and crime. Hacks, however, are excluded. Startups can end up paying as much as 5 percent of their coverage limits, according to the report. Insurance Journal estimates that annual premiums could be as much as $10 million for theft coverage. In cases of large amounts, the coverage is split between dozens of underwriters for amounts ranging between $5 million to $15 million to ensure that no single insurer is on the hook in cases of hacks.