Kachi Ogbonna

Cryptocurrency Insurance: What Is Crypto Insurance, and How Does It Work?

Due to the volatile nature of the cryptocurrency sector and the high return on investment it attracts, it is an easy target for cyber-attacks. For this reason the security risk of the sector can be very high. However, there are possible steps and strategies effective enough to handle these risks. And the best option is cryptocurrency insurance.

Cryptocurrency insurance gives investors the necessary confidence to invest in the booming industry.  With crypto insurance investors and businesses believe that their digital assets are safe from any sort of threats.

So if bank deposits are insured, why not crypto as digital assets?

Millions of dollars worth of digital currencies are being stolen every single week, leaving investors and business owners powerless as the anonymous nature of this sector essentially covers the criminals’ tracks and leaves the investor out of pocket.

What is Cryptocurrency Insurance?

Crypto insurance protects against losses associated with cybersecurity breaches.

Cryptocurrency insurance policies are designed to provide protection against cryptocurrency theft, losses as well as general cryptocurrency capital loss. Insurance as a means of responsible risk management is the next step in cryptocurrency’s ongoing evolution. And most cryptocurrency exchanges provide at least some insurance to protect digital assets against losses from security breaches and theft.

If you are considering making a crypto investment then this article on crypto insurance and how it works might be a good way to start. So, read and and learn everything you need to know about crypto insurance.

Frequently Asked Questions

The History of Crypto Insurance

Just like everything about cryptocurrency, crypto insurance is relatively new. It is not a concept that has history stretching down centuries.

Lloyds of London was the first insurer to offer liability type of crypto insurance. It started with flexible limits of as little as £1,000. That is approximately $1,353. It was co-created by Lloyd’s syndicate Atrium in conjunction with Coincover to protect against losses that could arise from the theft of cryptocurrency held in online wallets.

This type of insurance policy has a dynamic limit that increases or decreases in line with the price of crypto assets. This means that the beneficiary will always be protected for the underlying value of the insured asset. And this is even if the value of the crypto asset fluctuates over the policy period.

However, it’s essential to note that cryptocurrency is not yet a legal tender in America. This is because the government is yet to give her backing to it.  Therefore, cryptocurrencies are not subject to Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation protections.

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How Does Cryptocurrency Insurance Work?

Usually, investors in the United States who own conventional securities, such as bonds or stocks, have insurance backing from either the US government or their private insurance policies. However, crypto investors in the United States do not automatically have those same protections. But the growth of the crypto industry in recent years means that has become very necessary.

And that is where crypto insurance steps in to provide cryptocurrency owners with protection for their investments.

Currently, there is a growing demand for crypto insurance, especially for the events like theft. However, the biggest issue for insurers is the underwriting process when solid risk assessments become complicated due to a lack of cohesive regulations within the crypto insurance industry. Some newer and more forward-leaning startups have been more proactive in this area. But Stateside, for example is still not offering any guarantees.

Where then is the Security?

We all know that the crypto insurance industry is so volatile and unpredictable.

And this should ordinarily raise questions and concerns as to the security of one’s asset.

However, that is where companies like Gemini Crypto Insurance will be of great assistance.

The company explains that till date, insurance companies are still not eager to insure the crypto industry. And this is largely due to a large number of high-profile hacks that have resulted in catastrophic losses over the years. In addition to that is the poor security standards, internal controls, and policies and procedures that have unfortunately characterized much of the industry. As a result, many crypto exchanges and custodians have been either unable to obtain insurance or shied away from it. They shield away because of the high cost of premiums required by the few companies willing to insure the industry.”

However, Gemini, a New York trust company insists that it has successfully demonstrated to crypto investors that it is both safe and secured.  It is a secure exchange and custodian where customers can buy, sell, and store digital assets in a regulated, secure, and compliant manner.”

How it Works Depends on the Companies Involved

How this insurance works depends entirely on individual companies prepared to take on underwriting and insurance of the actual digital assets.

For example, a company like Coinbase Crypto Insurance says that:

“We are building the crypto-economy – a more fair, accessible, efficient, and transparent financial system enabled by crypto.”

“We started in 2012 with the radical idea that anyone, anywhere, should be able to easily and securely send and receive Bitcoin. Today, we offer a trusted and easy-to-use platform for accessing the broader crypto-economy.”

And they’re not taking this lightly! They have approximately 73 million verified users, 10,000 institutions, and 185,000 ecosystem partners operating or living in over 100 countries. In addition, they have $255 billion in assets on their platform.

Now, how this works is both simple and complex — all at the same time. While cryptocurrency is not legal tender in the United States, the money used to purchase crypto is. Yes, crypto can be bought in American Dollars, Euros, British Pounds, etc. That form of legal tender used to acquire the digital asset becomes part of the risk portfolio that insurers will assess when deciding on whether or not to underwrite and take on an insurance policy.

What Cryptocurrency Insurance Does Not Cover

It is not every loss that crypto insurance companies underwrites. Yes, they don’t take responsibility for certain losses. But those terms are equally made clear from the beginning.

However what it covers or not also depends very much on the insurance company. But generally, the policy won’t cover direct hardware loss and damage and transfer of cryptocurrency to a third party. Plus, it won’t protect against disruption or failure of the blockchain underlying the asset.

What Does All of This Mean for Cryptocurrency Insurance?

The world is seriously evolving. Everyone is beginning to take crypto advocates more serious. Russia is now considering accepting crypto for international payments. Also Elon Musk, the world’s richest person had in 2021 announced that Tesla plans to start accepting Bitcoin for the purchase of Tesla cars.

So it is just a matter of time before nations of the world and their respective governments will accept crypto as a legal tender.

However, this is likely to come at a cost. The inventors of cryptocurrency should be prepared that that government will have to introduce some regulations if they approve it. CEPS, a leading European think tank, recently reported that:

“The EU is proposing a specially dedicated regime for crypto-asset providers in the EU through the MiCA regulation. It will be the first international bloc to do so. When adopted, only licensed providers will be allowed to offer crypto-currency and operate crypto exchanges in the EU.”

So ultimately, insurers will be looking for greater regulatory clarity in the coming years before extending coverage further for more competitive pricing points. And they are  going to have to get there relatively quickly too.

But why are insurers so reluctant?

This is down, at least in part, to the ever-changing regulatory landscape. In January last year, the Office of the Comptroller of the Currency (OCC) granted a national trust bank charter to a South Dakota trust company. This made it the first digital asset bank in the United States. What that means is that government insurance and backing will have to start following suit — which in itself raises some very interesting questions regarding taxation and capital gains taxes in inheritances and wealth transfers.

Even the SEC (the Securities and Exchange Commission) has now also gotten in on the action, so to speak, as they have now clarified how broker-dealers must operate when acting as custodians of digital asset securities so that they don’t get into trouble with law enforcers.

Who Needs Crypto Insurance?

Almost every aspect of cryptocurrency business plus NFTs too have their associated risks. Therefore, they require difference coverages that intrinsically understand the needs of this ever changing sector. These sectors include:

•Exchanges
•Payment processing
•Mining
•Custodians
•Financial services (platforms)
•Wallets
•Infrastructure

Beyond this, crypto insurance is also important to and available to companies that transact in cryptocurrencies. Such could mean e-commerce websites that accept cryptos as a payment method and store the resulting income. Others could be exchanges that trade with large amounts of cryptos on a daily basis.

If you are thinking about investing in these currencies but have always been concerned about the risks associated with them, then crypto insurance can help to ease you into a secure investment.

Can You Purchase Personal Cryptocurrency Insurance?

Yes, although this is not as simple as a one-word answer. Like we have noted earlier, most crypto assets are not currently covered by insurance. And the reason is simple. The cryptocurrency market is still growing. This is just the early years of its adoption.

The largest section of the cryptocurrency insurance market is more likely to be held by the exchanges that trade in cryptocurrencies than individuals doing the trading. So, you’ll have to check with your platform directly to see if you are covered as a crypto purchaser when trading on that particular platform.

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Why Does Cryptocurrency Need Insurance?

Should someone actually still be asking this question by now? Even after all the explanations above? Well, even if it is for the emphasis I have to answer this in detail. At the risk of repeating myself, crypto insurance is extremely important because of the volatile nature of cryptocurrency.

A report by AON on crypto insurance reported that more than $1.3 billion had been stolen from exchanges since the first Bitcoin block was mined back in 2009. The report further has it that an average of $2.7 million of assets are stolen daily in 2018. Therefore, crypto insurance is essential in helping reduce the risk for anyone wishing to hold digital assets.

Criminals, of course, have seen the endless potential for moving vast amounts of cryptocurrency instantly as misappropriation is incredibly easy. With regard to cash, one has to steal it, and there are obviously limitations on how much can be taken. Besides that, cash can be traced but cypto is almost impossible to trace.

As far as crypto is concerned,all  a potential thief need is the key details of a crypto holder. Once that s gotten the thief can digitally transfer however much they wish straight into their anonymous account.

Crypto Insurance Financing

One must remember that the сryptocurrency business consists mainly of startups and exchanges. It’s simply not big enough to provide revenue for the insurance industry yet. Even North America’s biggest exchange Coinbase holds just 2% of its coins insured with Lloyds of London.

What is very interesting about the safe storage of these coins is that while some are held in hot storage — in other words, in locations connected to the internet, many are disconnected from the internet. So no one can really ascertain their insurance status.

Best Crypto Insurance

Regarding the best crypto-insurance provider, I will give few suggestions.

1. Lloyds
2. AON cryptocurrency insurance
3. Kase Insurance
4. Coincover

Conclusion on Crypto Insurance

There is no getting away from it; cryptocurrencies will change the way we understand and interact with money. It is just a matter of time before American government will accept it. They’re going to have an impact on how we secure our financial future sooner rather than later.

But despite all the possible high return associated with crypto investment my advice has always be the same – be driven by knowledge and not by greed. Another one is to start small and build your portfolio skillfully based on the knowledge acquired.

If it sounds too good to be true, put a knife on your throat – control your greed gauge.But whatever your decision, try to get crypto insurance if you can find any insurance company willing to insure your investment.

For now EU, Africa and even Asia are embrassing Crypto business. But America has never carried last and I don’t see them doing that iin this case. Elon Musk is already showing the way. The least every other American can do is to follow.