The crypto sector is inherently volatile and investors are known to have lost a significant amount of their portfolio as they were unable to manage the risks associated with their investments. However, following the explosion in the crypto sector in 2021, many crypto insurance providers have stepped up to ensure investors and crypto projects in case of mishappenings. However, it is also a fact that there are not many players in this industry due to increased instances of scams, hacks, and exploits.
Not only investors but projects have also been exploited in recent history and it is crucial to note that crypto insurance providers work for projects depending on the total value invested in the protocol. If the Terra ecosystem including the Anchor Protocol was insured, many investors would’ve got at least a part of their investments.
What is Crypto Insurance?
Crypto insurance is a type of insurance coverage specifically designed to address the unique risks and vulnerabilities associated with cryptocurrencies and blockchain technology. It aims to provide financial protection and mitigate the potential losses and damages that can occur in the world of digital assets.
In the realm of cryptocurrencies, there are various risks and challenges that users and investors face. These include exchange hacks, where cybercriminals breach the security of cryptocurrency exchanges and steal funds; theft of private keys, which are the cryptographic codes that grant access to one’s digital assets; fraudulent activities, such as phishing attacks and social engineering, which aim to deceive individuals and trick them into revealing their private keys or sending funds to fraudulent addresses; technical failures or glitches in blockchain networks, smart contracts, or decentralized applications that can lead to financial losses; and regulatory uncertainties, where sudden regulatory actions or changes can impact the value and availability of cryptocurrencies.
Crypto insurance steps in to address these risks and provide coverage for individuals, businesses, and institutions involved in the cryptocurrency ecosystem. It offers protection against potential financial losses resulting from these risks, giving users peace of mind and a safety net in case of unfortunate events.
Crypto insurance typically covers several areas:
Custodial wallet protection: Many cryptocurrency exchanges and custodial service providers hold users’ digital assets in custody on their behalf. Custodial wallet protection insurance covers the loss or theft of these assets, safeguarding them against hacking attempts, unauthorized access, or internal theft within the custodial system.
Private key protection: Private keys are essential for accessing and managing cryptocurrency holdings. If private keys are lost or stolen, users may permanently lose access to their digital assets. Crypto insurance can cover the costs associated with recovering or replacing lost private keys, ensuring that users can regain control over their assets.
Protection against exchange hacks: Given the history of security breaches in the cryptocurrency industry, users face the possibility of funds being stolen or lost due to hacking incidents on exchanges. Exchange insurance provides coverage to users, compensating them for the funds they lost in the event of a security breach or hacking attack on the exchange they use.
Protection against fraudulent activities: Phishing attacks, SIM swapping, and other forms of social engineering are prevalent in the cryptocurrency space. Fraud and theft insurance can protect users from financial losses resulting from these fraudulent activities, reimbursing them for funds that were stolen or fraudulently obtained.
Protection against smart contract failures: Another type of crypto insurance that addresses risks specific to smart contract technology. Smart contracts are self-executing contracts with the terms and conditions directly written into the code. However, vulnerabilities or coding errors can lead to unintended consequences or financial losses. Smart contract insurance protects against such situations, providing coverage for losses caused by smart contract failures or vulnerabilities.
Protection against failure of business operations: This is relevant for cryptocurrency-related businesses. It covers financial losses resulting from events that disrupt normal operations, such as cyber attacks, regulatory actions, or technical failures. This insurance helps businesses recover and mitigate the impact of unexpected disruptions on their operations and finances.
Protection against legal liabilities: This protects individuals and businesses from legal liabilities that may arise in the industry. This includes coverage for claims of negligence, data breaches, or unauthorized access to sensitive customer information.
It’s worth noting that the availability and coverage of crypto insurance can vary among insurance providers. As the cryptocurrency industry is still relatively new and rapidly evolving, the specific offerings and terms of crypto insurance policies are continually developing and adapting to the changing landscape.
Advantages of Crypto Insurance
Crypto insurance offers several advantages to individuals, businesses, and institutions operating in the cryptocurrency industry. Here are some key advantages of crypto insurance:
Risk Mitigation: Crypto insurance provides a means to mitigate the inherent risks associated with cryptocurrencies. It offers financial protection against potential losses resulting from hacking incidents, theft, fraud, technical failures, or other unforeseen events. Having insurance coverage reduces the impact of such risks and provides peace of mind to users and investors.
Asset Protection: Cryptocurrencies are digital assets that can be susceptible to theft or loss. Crypto insurance safeguards these assets, ensuring that users can recover their funds in case of hacks, theft of private keys, or other security breaches. It adds an extra layer of protection to the assets held by individuals or businesses.
Business Continuity: For cryptocurrency-related businesses, such as exchanges, custodians, or asset management firms, having crypto insurance is crucial for maintaining business continuity. Insurance coverage against hacking incidents, business interruptions, or regulatory actions can help businesses recover quickly and resume normal operations without significant financial strain.
Investor Confidence: Crypto insurance plays a vital role in boosting investor confidence in the cryptocurrency market. By providing insurance coverage, it demonstrates a commitment to risk management and protection of investors’ funds. This, in turn, can attract more investors and encourage wider adoption of cryptocurrencies.
Regulatory Compliance: In some jurisdictions, crypto insurance can help businesses meet regulatory requirements. Regulatory authorities often expect cryptocurrency businesses to have measures in place to protect customer funds and mitigate risks. Crypto insurance can serve as evidence of risk management practices and enhance compliance efforts.
Enhanced Trust and Credibility: The cryptocurrency industry has faced skepticism and concerns about security and consumer protection. By offering insurance, companies in the crypto space can enhance their trustworthiness and credibility. Insurance coverage demonstrates a commitment to protecting customer assets and provides assurance to users that their funds are safe.
Market Development: Crypto insurance can contribute to the overall development and maturity of the cryptocurrency market. As insurance products and coverage options expand, it creates a more stable and secure environment for users, investors, and businesses. This, in turn, encourages broader participation and innovation within the industry.
Recovery and Resilience: In the event of a loss or breach, crypto insurance helps users and businesses recover from financial setbacks. It provides the necessary funds to restore operations, compensate for losses, and continue operations without facing significant financial hardships.
Disadvantages of Crypto Insurance
While crypto insurance offers various benefits, there are also some potential disadvantages to consider. Here are a few disadvantages of crypto insurance:
Limited Coverage: Crypto insurance coverage may have limitations and exclusions. Certain risks or events may not be covered, or coverage may be subject to specific conditions or restrictions. It’s important to carefully review the policy terms and conditions to understand the extent of coverage and any potential gaps.
Complex Claims Process: The claims process for crypto insurance can be complex and time-consuming. Insurance providers may require detailed documentation and evidence to support a claim. Additionally, the verification of losses related to cryptocurrencies, such as determining the exact value at the time of the incident, can be challenging. This complexity may lead to delays or disputes during the claims settlement process.
High Premiums: Crypto insurance premiums can be relatively high due to the unique risks and uncertainties associated with the cryptocurrency industry. Insurance providers need to account for the potential losses and the evolving nature of the market, which can result in higher costs for coverage. This can make it costly for individuals or businesses to obtain comprehensive insurance protection.
Limited Availability: Crypto insurance options may not be widely available or accessible in all regions. The insurance market for cryptocurrencies is still developing, and coverage options may be limited or only offered by a select few providers. This can create challenges in finding suitable insurance solutions for specific needs or geographic locations.
Evolving Landscape: The cryptocurrency industry is constantly evolving, and new risks and vulnerabilities continue to emerge. Insurance providers may struggle to keep up with the pace of technological advancements and the evolving threat landscape. As a result, existing insurance policies may not adequately cover emerging risks, leaving potential gaps in coverage.
Regulatory Challenges: The regulatory environment surrounding cryptocurrencies and insurance can be complex and subject to change. Insurance providers may face challenges in navigating regulatory requirements specific to the cryptocurrency industry, potentially impacting their ability to offer comprehensive coverage or limiting the scope of their offerings.
Market Uncertainty: The cryptocurrency market itself is characterized by volatility and uncertainty. Fluctuations in cryptocurrency prices, regulatory actions, or market sentiment can impact the availability and cost of crypto insurance. Insurance providers may reassess their offerings or adjust premiums based on market conditions, potentially affecting the stability and predictability of coverage.
How Crypto Insurance Works
Crypto insurance works similarly to traditional insurance, but with adaptations to address the unique risks and characteristics of the cryptocurrency industry. Here is a general overview of how crypto insurance typically works:
Policy Creation: An individual or business interested in obtaining crypto insurance will approach an insurance provider specializing in cryptocurrency-related coverage. The insurance provider will assess the specific needs, risk profile, and coverage requirements of the applicant.
Risk Assessment: The insurance provider will evaluate the risk factors associated with the applicant’s crypto-related activities. This assessment may involve reviewing security measures, risk management protocols, and operational practices. The insurer will consider factors such as the type of crypto assets held, custody arrangements, security measures in place, and the applicant’s history of security incidents.
Policy Terms and Premium Calculation: Based on the risk assessment, the insurance provider will determine the terms of the insurance policy, including the coverage limits, deductibles, and exclusions. The premium, or the cost of the insurance, is calculated based on various factors, such as the level of coverage, the insured party’s risk profile, and the insurer’s underwriting criteria.
Policy Issuance: If the applicant accepts the policy terms and premium, the insurance provider will issue the insurance policy. The policy will outline the coverage details, policy period, premium payment schedule, and any specific conditions or requirements.
Premium Payments: The insured party will typically be required to pay regular premiums to maintain the insurance coverage. Premiums can be paid monthly, quarterly, or annually, depending on the agreed-upon terms. Failure to pay premiums may result in a lapse in coverage.
Claims Process: In the event of a covered loss or incident, the insured party can file a claim with the insurance provider. The claims process typically involves submitting documentation and evidence to support the claim, such as incident reports, transaction records, or other relevant information. The insurer will review the claim and assess its validity based on the terms and conditions of the policy.
Claims Settlement: If the claim is approved, the insurance provider will proceed with the claims settlement. The insured party will receive compensation for the covered loss, up to the policy’s coverage limit and after deductibles have been applied. The settlement may be in the form of cryptocurrency, fiat currency, or a combination of both, depending on the policy terms and the insurer’s offerings.
It’s important to note that the specific workings of crypto insurance can vary among insurance providers. Different providers may have different policy terms, coverage options, and claims processes.
Types of Crypto Insurances
There are several types of crypto insurances available to cater to different aspects of risk in the cryptocurrency industry. Here are some common types:
Custody Insurance: This type of insurance covers the loss or theft of digital assets held in custody by exchanges, custodians, or other service providers. It protects against risks such as hacking, insider theft, and unauthorized access to the custodial wallets.
Exchange Insurance: Exchange insurance provides coverage in the event of a security breach or hacking incident on a cryptocurrency exchange. It typically reimburses users for their lost funds or stolen cryptocurrencies.
Wallet Insurance: Wallet insurance protects individual users against the loss or theft of their private keys, which are essential for accessing and managing their cryptocurrency holdings. It may cover the costs associated with recovering or replacing lost private keys.
Smart Contract Insurance: Smart contract insurance covers financial losses resulting from vulnerabilities or errors in smart contracts. It protects against situations where the execution of a smart contract leads to unexpected outcomes, financial damages, or breaches of contractual obligations.
Fraud and Theft Insurance: This type of insurance provides coverage against fraudulent activities related to cryptocurrencies. It includes protection against phishing attacks, SIM swapping, and other forms of social engineering aimed at stealing cryptocurrencies from individuals.
Business Interruption Insurance: Business interruption insurance for cryptocurrency-related businesses offers coverage for financial losses caused by events that disrupt normal operations, such as cyber attacks, regulatory actions, or technical failures.
Liability Insurance: Liability insurance covers legal liabilities that arise from cryptocurrency-related activities. It may protect against claims of negligence, data breaches, or unauthorized access to sensitive customer information.
Mining Insurance: Mining insurance specifically caters to cryptocurrency miners. It offers protection against risks associated with the mining process, such as equipment damage, business interruption, or theft of mining hardware.
Initial Coin Offering (ICO) Insurance: ICO insurance provides coverage for risks associated with initial coin offerings, which are crowdfunding events where new cryptocurrencies are launched. It protects against the failure of the project, fraudulent ICOs, or regulatory non-compliance.
Stablecoin Insurance: Stablecoin insurance is focused on providing coverage for stablecoins, which are cryptocurrencies designed to maintain a stable value by pegging to a fiat currency or an underlying asset. It covers risks such as default on the peg, issuer insolvency, or regulatory actions.
Token Sale Insurance: Insurance coverage specifically for token sales or initial exchange offerings (IEOs).
Decentralized Finance (DeFi) Insurance: Insurance that covers risks associated with decentralized finance protocols, such as smart contract vulnerabilities, hacks, or liquidity risks.
Multisig Wallet Insurance: Insurance coverage for multi signature wallets, which require multiple signatures for transactions. It protects against the loss or theft of funds held in multisig wallets.
Cyber Liability Insurance: Insurance that addresses the risks of cyber threats and data breaches in the cryptocurrency industry, protecting against legal liabilities and associated costs.
Privacy Coin Insurance: Insurance coverage specific to privacy-focused cryptocurrencies, addressing risks related to privacy protocol vulnerabilities or regulatory actions.
Airdrop Insurance: Insurance coverage for airdrop campaigns, protecting issuers or participants against losses or liabilities related to airdrop events.
Exchange Default Insurance: Insurance that safeguards users’ funds in the event of an exchange default, where an exchange becomes insolvent or unable to fulfill its obligations.
Regulatory Compliance Insurance: Insurance coverage designed to assist businesses in meeting regulatory compliance requirements in the cryptocurrency industry, mitigating the financial and legal risks associated with non-compliance.
Cryptocurrency Asset Management Insurance: Insurance coverage for cryptocurrency asset management firms, protecting against losses resulting from theft, cyber attacks, or fraudulent activities.
Cross-Blockchain Insurance: Insurance that covers risks associated with interoperability between different blockchain networks, ensuring protection for assets transferred across multiple chains.
Major Crypto Insurance Providers
Several notable crypto insurance providers in the industry include:
Coincover: Coincover is a leading provider of cryptocurrency insurance and offers a range of coverage options, including custodial wallet protection and comprehensive asset insurance. The firm recently raised $30 million in a funding round led by Silicon Valley investment firm Foundation Capital.
BitGo: Established in 2013, BitGo is a well-known provider of cryptocurrency custodial services, and they also offer insurance coverage for digital assets held in their custody. Their insurance policies are designed to protect against hacking, theft, and other risks.
Marsh: Marsh is a global insurance brokerage and risk management firm that offers crypto insurance solutions. They work with various insurance underwriters to provide tailored coverage options for cryptocurrency businesses and individuals.
Nexus Mutual: Nexus Mutual is a decentralized insurance platform that offers coverage for smart contract risks. They provide coverage against vulnerabilities and failures in smart contracts, allowing users to protect their investments in decentralized finance (DeFi) protocols.
Aon: Aon is a multinational professional services firm that provides insurance and risk management solutions. They offer crypto insurance services, including coverage for digital assets and businesses operating in the cryptocurrency industry.
Lockton: Lockton is a global insurance brokerage firm that offers crypto insurance solutions. They work with clients to assess their specific risk profiles and provide customized coverage options for digital assets and cryptocurrency-related activities.
As the crypto industry gradually grows to be a multi-trillion dollar industry, crypto insurance will play a vital role in addressing the unique risks and vulnerabilities associated with cryptocurrencies and blockchain technology. We already discussed above that there are several benefits of having a crypto insurance policy but there are downsides as well.
The industry is still developing and investors are advised to take care of their keys and remain on the lookout for potential rug-pulls. This is because crypto insurance policy firms do not provide much coverage against rug-pulls that are initiated by project developers.
Crypto insurance serves as a crucial tool in managing risks and protecting assets within the cryptocurrency industry. By embracing insurance solutions, individuals and businesses can navigate the complex and dynamic landscape with greater confidence and security.