Cryptocurrency Insurance Could Be a Big Industry in the Future

Because they are common targets for hackers and thieves, businesses that hold cryptocurrency on behalf of their customers need insurance that covers customers’ losses due to theft and system or hardware failures. This need provides a market opportunity for insurers, provided that they can mitigate the risks.

Understanding Cryptocurrency Insurance

In the years immediately after Bitcoin launched, most traders relied on themselves for security and took personal responsibility for protecting their cryptocurrencies and securing their private keys. The owner had to absorb the losses if they had their keys stolen.

Self-custody became less practical as the market grew, especially for complex companies with many employees. Large exchanges have experienced major thefts, and customers have lost millions of dollars worth of cryptocurrencies. Not all cryptocurrency thefts have been from exchanges, but the vast majority are because it is a place where crypto keys are centrally located.

Responsibility Is a Key Factor of Need

Many crypto exchanges accept responsibility for and store customers’ keys. There are also more cryptocurrency investment products being invented, with brokers wanting to hold and securitize cryptocurrency.

All of this centralized holding and interest creates a responsibility for all parties involved to store cryptocurrency safely. Storing crypto is costly and risky, so businesses turn to companies that specialize in storage to store it for them. Here is where issues present themselves—for example, say you store your cryptocurrency at an exchange.

The exchange requires people to maintain its data storage equipment and security. If they don’t have the hardware or employ people to do it, they contract another company to store the cryptocurrency keys—which then employs people to maintain and secure the data storage hardware and software. Cyber and physical security is likely provided by contracted security firms, involving more people, connections, software, and hardware.

Vulnerabilities, and thus opportunities for thieves, grow the more entities that are involved. The amount of wealth being stored is a huge responsibility, and insurance is the only way to ensure that the assets the original customers placed in custody can be replaced if something happens.

Awareness Is Growing

Billions of dollars worth of cryptocurrencies continue to be stolen as businesses in the space have struggled to protect their customers’ assets. Slowly but surely, insurance providers have begun to notice the growing necessity (and opportunity) for policies to cover virtual and digital asset theft and loss.

Examples of Cryptocurrency Insurance

Several companies provide insurance services for companies that deal with cryptocurrencies. Some insurers may insist that their clients adopt certain security protocols to reduce their risk exposure, while others insist that insured funds be deposited with a reliable custodian. Many exchanges and businesses use the services of insurance providers to cover their customer’s assets.

The following are some examples of coverages businesses in the cryptocurrency industry provide:

• BitGo: Bitgo is a digital asset provider for exchanges and retail cryptocurrency companies. Its policy covers up to $250 million for assets in its custody. Notably, the policy only covers situations where BitGo has sole control over the client’s cryptocurrencies. BitGo uses Lloyd’s as its insurance underwriter.
• Coinbase: One of the most popular crypto retail brokers, Coinbase has a $255 million policy for covering coins stored in hot wallets. However, this policy does not cover thefts due to unauthorized access to the client’s accounts, lost passwords, or third-party wallet hacks.
• Bakkt: A crypto custody firm serving institutional investors, Bakkt provides up to $125 million of insurance coverage for assets under its control.
• Coincover: Providing commercial liability insurance against thefts from cold and hot wallets, Coincover’s policies are underwritten by a panel of Lloyd’s insurers, with limits that change according to market prices.

Special Considerations

Many startups and companies operating within the cryptocurrency industry typically opt for cyber and crime insurance, which generally covers thefts. Hacks are also included in cyber insurance policies and some crime coverage.

One of the most important factors behind these policies is that they only cover assets that are held in custody or if the company holding them is at fault. For example, if a software or hardware failure or weak point in their cyber security lets hackers through, your crypto is likely covered. But if you lose your keys, your losses are likely not covered.

The Bottom Line

Insurance coverage for cryptocurrency is usually part of commercial cyber or crime insurance, which is only available to enterprises. In some cases, crypto-related companies might set aside funds to cover customer losses from theft. This type of insurance has become necessary as cryptocurrency-related businesses and exchanges hold large amounts of cryptocurrency keys in custodial wallets. These entities are targeted by more than retail users due to the enormous wealth they hold via crypto keys being held for customers.

Retail users are not yet covered by any policies unless they store their crypto keys on an exchange or in a business specializing in crypto key storage. Even then, they are only covered if the business is hacked and coins are stolen or if the loss is the company’s fault.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author owns BTC and LTC.