How do you insure crypto assets?
The fiat global insurance market was noted to be almost $6trillion in 2022 and is expected to rise to over $8trillion by 2026: https://www.statista.com/statistics/1192960/forecast-global-insurance-market/ and according to the ABI, in the UK alone, there were £47.2m in claims processed each day for motor and property insurance in 2020, and £250m paid out to travellers though travel insurance claims whilst they were travelling abroad. However they also noted that there were £1.14bn of fraudulent claims detected in 2020. https://portfolio.cpl.co.uk/ABI-KeyFacts/2022/top10/
It’s therefore clear that the fiat insurance market is huge and provides a critical service to ensure people’s belongings and even lives can be protected, however it’s also one which bad actors look to exploit.
So how does insurance work when we think about crypto assets and how could the criminal angle come into play?
Firstly let’s look at _what_ you can insure because it’s important to draw the distinction between insuring fungible assets like bitcoin and ether vs non-fungible assets like a Crypto Punk or Gotchi, and then insuring your crypto businesses.
Insuring Your Crypto Business
There’s a range of firms across the space who will provide business insurance against crypto themed losses like system hacks and cybersecurity attacks. Some of the most well known names are Aon, Lloyds of London, Evetas and Coincover.
This gives businesses some comfort that if the worst were to happen then they could claim on their insurance and plug the hole from any losses.
Many centralised crypto exchanges promote their insured status, using these solutions to ensure if they get hacked then they can make customers whole again. However it’s worth noting that this doesn’t necessarily protect them/their users against all events e.g “Coinbase carries crime insurance that protects a portion of digital assets held across our storage systems against losses from theft, including cybersecurity breaches. However, our policy does not cover any losses resulting from unauthorized access to your personal Coinbase or Coinbase Pro account(s) due to a breach or loss of your credentials,” according their website: https://help.coinbase.com/en/coinbase/other-topics/legal-policies/how-is-coinbase-insured
Binance has taken a slightly different approach, setting up a Secured Asset Fund for Users (SAFU) in 2018 which they could pay out from in the event of a hack. This was put into play in 2019 when they suffered a $40m hack and had to pay out from the SAFU.
Post the FTX collapse, crypto insurance firm Evetas published a blog post titled “Web3 needs more insurance, not more regulation” , it’s well worth a read: https://www.evertas.com/web3-needs-more-insurance-not-more-regulation/
However if you’re an on-chain crypto business then you might need to look to firms like Nexus Mutual, a decentralised insurance firm which operates fully on-chain to pool funds and pay out insurance claims — all via smart contracts. They have $4bn of covers underwritten and $9m+ of claims paid and currently help protect against failures in an individual protocol, validator penalties and missed rewards for Ethereum staking, depegging events for interest bearing tokens and losses from a CEX.
Insuring Your Fungibles
In the TradFi world, any money you store with a bank if protected up to $250,000 in the US by Federal Deposit Insurance Corporation (FDIC) and up to £85,000 in the UK by the
Financial Services Compensation Scheme (FSCS). However no such protections exist in the crypto world — there is no centralised compensation scheme to bail you out if your crypto gets stolen. Instead you may have to rely on whatever insurance policies the venue you’re storing the assets with has. This could be some, or it could be none and bye bye crypto.
However there are also a range of insurance options you can personally opt into such as using Nexus Mutual’s Custody Cover to protect against losses from a CEX or their Token Yield Cover in case of a depegging event. Likewise a policy against depegging can be taken out from Etherisc, and after the turbulent market conditions of 2022 where Terrausd, Neutrino USD, HUSD, and FLEXUSD all depegged from their $1 parity, it’s clear why this is an area of focus for crypto insurers. Companies like https://cryptocurrencyinsurance.io/ also provide individual policies for crypto protection.
Insuring Your Non-Fungibles
However, where these insurance policies might repay you in an equal amount of USDT if your BTC gets stolen or your ETH is held in a CEX that collapses, and you’d be happy with the outcome of this, there needs to be a different approach and thinking around insurance for non-fungibles.
That’s because a non-fungible asset can be worth more to someone than just it’s monetary value. It would be an NFT-ticket which represents your attendance at some meaningful event you attended. It could be a piece of metaverse land which by losing the NFT itself, you lose the build on top of it. It could be a digital pet you have raised and befriended. It could be access into a gated community.
It’s akin to having your dog stolen and the insurance company trying to make it all better by offering you $5000 in cash. Whether your dog is ‘worth’ $5000 or not is irrelevant, they’re a priceless part of your family which likely no amount of cash can replace.
And as crazy as it may sound, this is how many people view their NFTs.
As such non fungibles insurance needs to take into account that a monetary compensation might not be sufficient for users, or that a higher compensation may be required to help ape back into whatever community/project they were ejected from.
NFT insurance is still at a VERY early stage and the only examples I could find were crypto custodian Aegis Trust offering a $25m insurance policy for NFTs and insurance firm SuperScript claiming to offer NFT insurance. However the bulk of material on the topic of NFT insurance is currently still conversations about how novel the concept is. I await the innovation around this topic and some exciting solutions which will inevitably be developed!
N.B There’s also options for insuring IRL/TradFi things ike crop insurance and flight cancellations but using the blockchain for verifiable payments and immutable policies e.g Lemonade, Etherisc.
Originally published at https://www.linkedin.com.
