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Cryptocurrency insurance offers ”big opportunity” despite risks

3 October 2022

Industry experts believe cryptocurrency insurance is poised to become a “big opportunity” with less than 2% of crypto-related risks currently insured.

While the market has a limited supply of crypto insurance options, supply continues to grow steadily despite the complicated nature of decentralized trading and lack of government regulation.  Many insurers have hesitated as the crypto market is viewed as volatile and high risk.

However, the market is gaining more acceptance in the traditional financial system and large well established institutions with excellent risk controls are now able to access more reasonably priced and generous cover than was previously available.

Crypto insurance is designed to protect against losses associated with cybersecurity breaches. Most major crypto exchanges carry at least some insurance to protect the digital assets in their custody against losses from theft and other security breaches.

However, many crypto assets are not protected with insurance policies as they are designed for businesses and corporations. The largest insurance market in the cryptocurrency industry is insuring the exchanges against theft from cryptocurrency hackers.

Bitcoin and cryptocurrencies present unique challenges as insurance premiums are based on historical data which is absent for cryptocurrencies.  As a result, according to Edin Imsirovic, associate director at insurance credit rating agency AM Best, “less than 2% of crypto-related risks are currently insured.”

A report by Bloomberg, the business and financial data experts, says cryptocurrency insurance offers a “big opportunity” as start-ups and companies typically opt for theft coverage, which includes cyber insurance and crime, but hacks are excluded. Start-ups that are able to demonstrate strong risk management are more likely to be viewed more positively to insurance underwriters.

The Poly Network, an interoperability protocol that lets users trade one cryptocurrency for another, was hacked last year resulting in more than Euros 627 million ($600 million) being stolen from Ethereum, Binance Smart Chain and Polygon wallets.  All assets were returned to Poly Network over the following 15 days with hackers claiming they wanted to highlight security weaknesses.

In the Chainalysis 2022 Crypto Crime Report,  cryptocurrency-based crime in 2021 hit a new all-time high, with illicit addresses said to have received around Euros 14.6 billion ($14 billion) in proceeds during the year, up from Euros 8.1 billion ($7.8 billion) in 2020.

Across all cryptocurrencies tracked by Chainalysis, total transaction volume grew to Euros 17.5 trillion ($15.8 trillion) in 2021, up 567% from 2020’s totals.

Because cryptocurrency isn’t legal tender, it’s not protected the same way other deposits may be by bank insurance.

Directors and Officers (D&O) liability insurance has become a factor in the crypto insurance market. Claims can be made against the directors and officers of crypto firms by investors or shareholders, where they believe directors or officers of the crypto exchange have fallen short of their regulatory obligations.

W Denis can arrange specialist cyber insurance cover and can offer first class technical advice. Solutions are available for multi-billion turnover businesses, down to small start-ups. To discuss this further please contact Vida Jarašiūnaitė or Mark Dutton

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