Headline: Who provides Insurance to crypto exchanges?

Date:

As cryptocurrency markets mature, they are attracting players from other industries. The insurance industry is one of them.   Before you fall asleep, this is actually really important, as the insurance markets will likely form the vanguard of normalization of cryptocurrency.  And you, dear reader, may stand to make a tidy profit in USD from buying very real shares of ownership in these companies.

Why Does the Cryptocurrency Ecosystem Need Insurance? 

Why do you need health insurance?   In case you have any catastrophic incident that lands you in the hospital, you need insurance to keep you from going bankrupt.  So often, this is because of (at least partially) the uncontrollable actions of others, you need insurance.  With rug pulls, heartbeat schemes and many others, the need for insurance seems axiomatic for the individual.    So it is for businesses who deal with cryptocurrencies.

OK, so, what is the problem?   Why can’t we see products of all types aimed towards the cryptocurrency markets?  There are a few reasons for this.  First, the insurance markets depend a lot upon track record   Facts being facts, cryptocurrency doesn’t have too much of a track  record.  Second, the volatility involved is insane.

Is this really a big deal?

Yes.  Per a report from Aon/Lloyd’s of London, this segment reflects $500 Million in business already, and it is quickly growing.  As it turns out, Lloyd’s of London just put together a $255 Million policy to cover Coinbase.  Even in the world of games, this is serious.  Axie Infinity suffered a $615  Million hack.  Per a report from Chainalysis, $14 Billion reached illicit addresses, and this was 2022.   So, yes, it IS a big deal.

So, what insurance do they usually use?

Most cryptocurrency concerns opt for theft insurance, covering them both against crime and cyberattack.  (Sounds pretty good, huh?  I thought so too.)  Specifically  not included is coverage for “hacks.”  My first question is what is the difference between a hack and a cyberattack?  The boilout is that the startups are forced to assemble their own syndicates to under-write this risk of loss from hacks, or they might be forced to fund 5-10% of their own insurance.  Coinbase goes even further in its agreement with a customer, and explicitly tells them that they have NO insurance against them losing their personal credentials.

Unfortunately, there will always be hackers, so, many companies in this area have set up Secured Asset Fund for Users (SAFU.)  Think of this as a bond sinking fund, only, instead a debt instrument maturing, the funds are used to make whole anybody who had their account hacked.   About 5 years ago, Binance had such a $40 Million problem, and paid it all out of SAFU.  One might be excused for saying that a cryptocurrency firm sets up a SAFU to deal with a SNAFU.

The Verdict

Insurance is not a sexy topic, usually, and it likely shouldn’t be  But, it cannot be denied that it rules our lives.   Health insurance, car insurance, life insurance, each plays their part to making life better, or more predictable.  But, the ground truth is this: Just before any industry is ready to really make it big, there is an insurance product built such that participants do not lose everything if there is a catastrophic failure.  So really, it is a function of the market to tell authorities when another type of coverage is needed, and how it should work.  It’s just that this conversation is slow and nuanced, and cryptocurrency has come on the scene, talking like an auctioneer.  But, I have faith in capitalism; People will sense the money to be made, and soon thereafter, a decent insurance product will emerge.

 REFERENCES

https://www.investopedia.com/news/cryptocurrency-insurance-could-be-big-industry-future/

https://www.insurancebusinessmag.com/us/news/breaking-news/aon-provides-insurance-to-cryptocurrency-exchange-232041.aspx

https://www.insurancejournal.com/news/international/2022/01/31/651543.htm

https://coingeek.com/aon-lloyds-of-london-lead-growing-crypto-insurance-industry/

https://www.investopedia.com/crypto-insurance-5441920

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

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