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Crypto Insurance Explained – Why It May Not Cover as Much As You Think

More and more exchanges are claiming to be backed up by insurance policies. But what do their insurance policies cover exactly? Moreover, are any insurance companies coming up with policies to support individual investors?

Read on to learn the answers to those questions and learn all the most important facts related to cryptocurrency insurance.

Factors Driving Demand for Cryptocurrency Insurance

Cryptocurrency insurance products are designed to provide coverage in the event of a loss involving bitcoin or other cryptocoins. Here’s why more cryptocurrency exchanges are buying coverage.

Cybercrime Costs $600 Billion per Year

Cyber security experts are saying that that the cybercrime has risen to dizzying new heights. A spokesman from internet security firm McAfee told CNBC described the situation as a crime pandemic.

“When you look at the cost of cybercrime in relation to the worldwide internet economy — $4.2 trillion in 2016 — cybercrime can be viewed as a 14 percent tax on growth.”

Cryptocurrency exchanges are particularly vulnerable. Over 30 high-profile cryptocurrency exchange hacks have occurred since 2011. The worst of them– a massive hack involving the theft of over $500 million dollars’ worth of crypto funds— occurred last January.

Insurance is a sign of legitimacy for crypto exchanges

Though many blockchain companies are truly innovative, others are total scams– and still more are led by sloppy, inexperienced leaders. The crypto industry as a whole is widely perceived to be risky and immature. More or better cryptocurrency insurance can help combat this image and make a crypto project seem more legitimate.

Cybercrime insurance isn’t enough

Insurance that specifically covers cryptocurrency losses is much better than standard cybercrime insurance. Most cybercrime insurance policies only cover tangible asset losses like damaged or missing hardware and/or costs involved with conducting forensic investigations.

Cybercrime insurance just isn’t very effective when it comes to covering cryptocurrency losses. Most well-known cryptocurrency-related hacks remain unsolved. Also, the vast majority of cryptocurrency hacks don’t involve hardware at all.

Helps build ties to the fiat finance system

Another reason more cryptocurrency exchanges are investing in insurance is that some fiat banks simply won’t do business with them if they don’t. Cryptocurrency exchanges depend on fiat banks because they provide ways for their customers to deposit government-issued currencies and buy cryptocurrency with bank cards.

Crypto Presents Opportunities for Insurance Companies

Many big-name insurance companies haven’t created cryptocurrency insurance products yet. Some believe that they could be missing out– particularly if the cryptocurrency industry continues to grow.

Christian Weishuber, a spokesman for Allianz, told Bloomberg that the insurance companies that are willing to work with blockchain companies– in particular, cryptocurrency custodial services– could stand to benefit.

“Insurance for cryptocurrency storage will be a big opportunity. Digital assets are becoming more relevant, important and prevalent on the real economy and we are exploring product and coverage options in this area.”

Acquiring Crypto Exchange Insurance Isn’t Easy

Many insurance companies aren’t familiar with cryptocurrency or how it works. This knowledge gap alone can make it hard for cryptocurrency exchanges to find coverage. But that’s just one of the many challenges they have to overcome.

It’s pricey

Cryptocurrency exchange insurance can be expensive. According to Bitcoin News, crypto exchange insurance can be five times the cost of typical business insurance.

BitGo became one of the first exchanges to get insurance coverage in 2015. A year later, BitGo dropped its coverage because the exchange decided it was too expensive.

Applying can be time-consuming

Exchanges that are willing to invest in coverage must also be willing to have long conversations about what they do. Insurance companies may ask for detailed information about how the business operates.

Exchanges first have to explain how they store their cryptocurrency assets. Some insurance providers will cover “cold storage” custodians only. Other factors that insurance companies may consider include the experience levels of the exchange’s leaders, whether or not they follow AML (Anti-Money-Laundering) standards, which accountants and banks they work with and other considerations.

How Does Insurance Benefit Cryptocurrency Exchange Customers?

Crypto exchanges that are insured aren’t shy about advertising that they’re covered.

When exchange insurance matters

Coinrail customers would have been better off if Coinrail had invested in insurance before it lost $40 million dollars’ worth of various cryptocoins to hackers last June. Some insurers that work with crypto exchanges have policies that cover up to $100 million dollars’ worth of crypto assets.

According to CoinDesk, the exchange managed to secure 70 percent of its assets by moving them to cold storage, but hackers stole a full third of the remaining 30 percent. Coinrail customers affected by the breach did nothing wrong, but found less money in their accounts after the hack.

What exchange insurance doesn’t cover

Just because the exchange you use is insured doesn’t mean that your assets are safe. If you expose your account by failing to adequately protect it– if you neglect to enable two-factor authentication, for example– that’s on you. Crypto exchange insurance only covers you in the event that the hack was no fault of your own.

Don’t take claims about insurance at face value

Some exchanges brag that they are insured, but they overstate the amount of insurance that they actually have.

According to Bloomberg, some exchanges have to work with a dozen or more underwriters to make sure that all their bases are covered. The reason: many individual insurance providers don’t want to be responsible for covering all of an exchange’s assets.

Insurance Firms that Serve Cryptocurrency Exchanges

Only a handful of insurance companies openly advertise that they offer cryptocurrency exchange insurance. Here are a few of the major players.

  • Marsh & McLennan. According to CCN, Marsh & McLennan recently created a 10-person team to serve the needs of blockchain startups.
  • Aon. Gemini made headlines two weeks ago it announced that it had secured crypto insurance for Gemini through Aon. Aon claims to have cornered 50% of the market for crypto insurance.
  • American Insurance Group. Reuters recently reported that insurance giant AIG is considering creating insurance products for crypto exchanges, but is still in an “exploratory phase.”
  • XL Catlin. XL Catlin became one of the very first insurance firms to venture into cryptocurrency territory when it became BitGo’s insurance provider in 2015.

These Cryptocurrency Exchanges Claim They’re Covered

As mentioned above, cryptocurrency exchanges that have invested in coverage aren’t shy about sharing that information with potential customers. Here are a few of the major exchanges that say they’re insured.

Gemini

Source: Gemini

Gemini customers enjoy two layers of protection against hackers that target the Winklevoss twins’ exchange: FDIC-backed coverage for their USD assets and crypto asset coverage through Aon.

“Gemini maintains insurance coverage for the digital assets that we hold on your behalf in our online hot wallet. Please see the Digital Asset Insurance section of our User Agreement for more information.”

Related: Gemini Review: Winklevoss Twins Seek to Legitimize Cryptocurrency

Coinbase

Source: Coinbase

Coinbase– another major US-based crypto exchange– seems to have an insurance policy that resembles Gemini’s. However, the legal section of the Coinbase website doesn’t specify who its insurance providers are:

“Coinbase maintains commercial criminal insurance in an aggregate amount that is greater than the value of digital currency we maintain in online storage. Our insurance policy is made available through a combination of third-party insurance underwriters and Coinbase, who is a co-insurer under the policy. The policy insures against theft of digital currency that results from a security breach or hack, employee theft, or fraudulent transfer.”

Related: Coinbase Review: A Popular Exchange With Smart Money Behind It

Circle Internet Financial

Global crypto finance company and peer-to-peer payments provider Circle also has insurance. However, Circle is cagey about revealing specific details about its coverage. This knowledge base article states that all its customers’ bitcoin assets are covered by an unnamed insurance company:

“You’re welcome to hold bitcoin in your Circle Pay account and it will be covered by our third party private insurance, like always. You can also receive bitcoin to any address associated with your account.”

CGCX

A new Singapore-based crypto exchange called CGCX bills itself as the “first insured hybrid crypto exchange in Singapore.” However, the CGCX white paper only provides vague promises about insurance:

“To provide peace-of-mind to our users, on top of implementing strict security measures for our
infrastructure, we will also channel some of our revenue toward obtaining insurance coverage that will provide financial protection for our users. Users in the CGCX platform can use their CGCX Token(s) to vote for multiple tokens. We plan to use 50% of tokens received as voting fees for insurance costs to build further insurance protections.”

Bithumb

Bithumb is an example of an exchange that is in fact insured, but lacks adequate coverage. According to Business Korea, Bithumb’s insurance only covered $5.39 million dollars’ worth of the $36.46 million that it lost last June.

Cryptocurrency Insurance for Individuals

Do you trust your cryptocurrency exchange? If the answer to that question was no, you may want to consider individual cryptocurrency coverage. Only a handful of companies offer individual crypto insurance now, but that may change if the crypto industry continues to develop.

Allianz

Allianz doesn’t have any information about its cryptocurrency insurance products on its website. However, Bloomberg and others have reported that the insurance giant started offering individual coverage for crypto theft last year.

Noble Bitcoin

Noble Bitcoin is different than big name insurance companies because it’s far more specialized. It’s a cryptocurrency IRA company that has just added insured cryptocurrency storage to its menu of services. As Noble Bitcoin’s name suggests, it only supports bitcoin. The company holds its customers’ bitcoin funds at a secure cold storage location in Texas.  

Etherisc

Etherisc is a decentralized insurance protocol. It has already spawned blockchain-based solutions for flight delay insurance and hurricane protection. The next Etherisc product will be crypto wallet insurance, or ICW. The initial ICW was published to GitHub last year. Contributors to the project include Consensys scientist Christian Lundkvist and Ethereum creator Vitalik Buterin.

Final Thoughts

Almost every type of small business owner purchases some type of insurance before they open up shop. Insurance protects against all the risks involved with striking out on your own, from legal issues to theft and natural disasters. Yet many blockchain businesses– even some of the largest cryptocurrency exchanges on the market– have decided to operate with minimal or nonexistent coverage.

A high-level look at the state of cryptocurrency reveals that the cryptocurrency industry still has a long way to go when it comes to insurance. Few cryptocurrency exchanges that say that they are insured are willing to give specific details. Many won’t even name their insurance provider. Others provide false information about the nature of their insurance plans.

Mt. Gox provides an example of what can happen when a crypto exchange fails to insure itself. When hackers stole $409.2 million dollars worth of crypto from its coffers, its customers were left twisting in the wind. The entire industry had to take a step backward and readjust. The recent Coinrail hack shows that the industry needs to do more.

Now that the cryptocurrency industry is starting to mature, more and more exchanges are looking for insurance coverage. However, because few insurance companies understand cryptocurrency and only a small percentage of those that do are willing to actually insure it, finding a crypto exchange insurer is easier said than done. Individual crypto insurance plans are also hard to find.

From the looks of things, the situation is changing. Insurance giants are finally beginning to develop products that are designed to meet the needs of individual crypto investors and cryptocurrency exchanges. At the same time, innovative decentralized insurance protocols like Etherisc are beginning to appear.

Alex Munkachy

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