Cryptocurrencies are digital native assets with no physical components or inherent physical characteristics. They are encoded into the blockchain world. and even with a very volatile market, interests in cryptocurrencies are growing. However, investing in cryptocurrencies comes with its own risks.
Can I insure my cryptocurrencies is therefore a legitimate question and there has been a demand in the past months for cryptocurrency insurance. But with an unregulated market, and a very complex and new technology (blockchain), insurance companies are not yet very open to offering comprehensive protection for cryptocurrency owners.
I – Are my cryptocurrencies safe and secured?
Cryptocurrencies are stored in a digital wallet (hardware / cold wallet or web-based / hot wallet) and exchanged through dedicated exchange platforms. Blockchain technology is a very secure technology however as goes the saying where there is money people are trying to steal it. At this moment, the market capitalization for cryptocurrencies is now evaluated at USD 1 trillion.
There is no centralized data about cyber hacks, frauds, or scams in the crypto environment. However, you could find lots of information online. SlowMist is a blockchain security firm. It reports on its website details about each disclosed attack aimed at blockchain projects, apps, tokens, and crypto exchange.
We have reported below some of the incidents that occurred in the past few years on crypto exchange platforms. However, these are just examples.
In 2019 as an instance, 12 crypto exchanges have been hacked leading to the loss of USD 300M worth of cryptocurrencies. Several reports show that adding financial exit scams and insolvency (Quadriga), the amount of stolen crypto is more around USD 4 Bo.
In 2020, 10 crypto exchanges have been hacked for a total sum of around USD 400M worth of crypto. Adding all the financial fraud, the figure increased to USD 3 Bo.
From the incidents mentioned above, if blockchain is an advance IT technology, the security of cryptocurrencies remains a challenge in the industry.
II – What are the main risks of owning cryptocurrencies?
If your business owns or trades cryptocurrencies, the previous data show that your crypto assets are at risk. Besides volatility, compliance, or taxes issue, the following type of risk shall be considered
- Loss or theft of the digital private keys or in the physical format following a cyber attack;
- Physical damage to your cold wallet or theft of the cold wallet;
- Financial scams: some Initial Coins Offerings (ICO) turned out to be fraudulent. ICO is a way for startup crypto companies to raise money. Not all ICO are fraudulent but more attention must be brought to newly created crypto.
- Insolvency of the crypto company = the most famous example is the Canadian crypto exchange company called Quadriga in 2019
III – What are the existing insurance solutions?
Insurance industry is facing numerous challenges with the insurance of cryptocurrencies and blockchain technology. This new technology evolves so quickly that it is difficult to evaluate the risks. Then, data in relation to the frequency and severity of incidents are missing.
To answer these challenges, insurance market has answered using 3 types of standard insurance that they adapt to the crypto environment.
- Crime insurance covers cash, assets, or other property in case of fraud, embezzlement (white-collar crime in which a person or entity misappropriates the assets entrusted to them), forgery (the action of forging a copy or imitation of a document, signature, banknote, or work of art), misrepresentation, robbery or theft. Crime insurance focuses on hot wallet losses and value transit due to hacking, insider theft, and fraudulent transfer.
- Species insurance covers the asset at rest or in transit against material or physical damage. Species insurance focuses on physical damage or loss of private keys stored in hardware, including employee misuse or theft. No cover for cyber hack/crime-related coverage. Insuring the value at rest is the same as insuring your gold in a vault.
- Cyber insurance = cyber insurance does not cover the actual value of the stolen data. It covers cost such as notifying customers, resolving IT issues, recovering lost or compromised data, and compensating loss for a business interruption for custodians or platform exchanges.
IV – In conclusion
The crypto market is a growing market with its own risks that need to be insured. The insurance market is on it but has still a long way to go. Maybe soon, we will see insurers holding cryptocurrencies to indemnify a loss in the stolen cryptocurrency. At the moment, the limit are reimbursement are expressed in USD.
If you have question and want to know more about insurance for cryptocurrencies, please dont hesitate to contact us.