Crypto Insurance Needs More Transparency – The Green Light
Insurance policies have been around since pre-history. In the barter economy, people would commit to rebuilding houses for their neighbors in cases of natural disasters. Public granaries existed to serve as a way to protect communities against famines. In the modern monetary-based economy, insurance for bank accounts has become standard in many countries.
The launch of Bitcoin in 2009 changed the monetary economy, allowing individuals to have complete ownership and responsibility of their own assets. However, no insurance policies existed. This meant that issues like stolen private keys and phishing attacks lead to people losing their digital assets. Now, insurance policies are emerging to provide coverage.
The concept of having 100% control of funds was the original intention of Satoshi Nakamoto when Bitcoin launched. Custodianship seems to work counter to this idea, but it’s important to think of it from an investor’s perspective. Is the ability to quickly and freely move funds as important as ensuring that funds are protected?
The answer to this question likely depends on the individual as well as the amount of funds. For example, having the equivalent of $100 in uninsured crypto is much different than having $10,000. Storing funds in a cold wallet can help but doesn’t prevent all issues.
The alternative — keeping funds on most centralized crypto exchanges — is typically a bad option. In the early years of cryptocurrencies, insurance policies weren’t talked about much. For the most part, users didn’t know which exchanges held insurance policies, which insurance company provided coverage, and to what extent they were covered. Hacks of centralized exchanges were and still are rather frequent occurrences. After these incidents, people who keep funds on exchanges are left questioning whether their losses are covered by the exchange. This has eventually led to a push for exchanges and asset custodians to add crypto insurance policies and provide coverage detail to users. However, transparency is still lacking across the board.
In February 2019, BitGo announced the launch of a $100 million insurance policy for cryptocurrencies and digital assets held in their Business Wallet and Custody offerings. The company uses a group of 10 Lloyd’s of London underwriters. In March 2019, one of the smaller underwriters accused the custodian of exaggerating the scope of its coverage by using “ambiguous language” in public statements.
Coinbase has had crypto insurance coverage since 2013. In an April 2019 report, Coinbase made public the fact that it holds “a hot wallet policy with a $255 million limit placed by Lloyd’s registered broker Aon and sourced from a global group of US and UK insurance companies, including certain Lloyd’s of London syndicates.” The term “sourced from a global group of top tier insurance companies” is still vague. That’s because, as the blog post explains, insurers take positions of loss in a ‘tower’ in order to mitigate risk. It’s possible that providers frequently change their positions, so this makes it hard to be 100% transparent on how exactly it is able to cover funds.
In June 2019, digital asset custodian METACO announced that it would be offering an insurance policy through insurance firm Aon. According to Aon, the policies cover losses on everything from natural disasters destroying the private keys kept offline in cold storage to third-party hacks of hot wallets connected to the internet. The coverage includes a greater number of possible scenarios than most policies. The dollar amount of coverage hasn’t been published, making it difficult for users to know to what extent they are covered.
On November 14, Ledger announced the addition of a $150 million policy for Ledger Vault users through Lloyd’s of London syndicate Arch. This news could be a potential game-changer for the future of crypto insurance policies. Why? Although Ledger Vault is a custodial platform, it enables users to access and move crypto funds with their hardware Ledger wallets. The insurance is also available at no cost to Ledger Vault users.
According to a Coindesk article, “Ledger’s policy covers third-party theft of private keys in the event of a physical breach of a hardware security module (HSM) in one of its data centers. Also covered is the entirety of the on-boarding process for clients which involves the generation of private keys within the company’s HSMs, as well as collusion within Ledger leading to insider employee theft.”
Ledger’s new policy won’t cover theft via a third-party remote hack, the problem that is most common among centralized exchanges that lose user funds. The positive news is that the Ledger Vault’s security solution isolates private keys in order to prevent this type of hack from occurring in the first place. Similar to other policies, however, the focus is on institutional investors. This means individuals with smaller amounts of crypto funds probably won’t be able to qualify for coverage.
Crypto insurance policies are more accessible than ever before, at least for crypto exchanges, custodians, and institutional investors. Individuals with smaller amounts of crypto don’t have these options yet. At some point in the future, coverage might be available to everyone. A few challenges still need to be addressed.
For example, the fact that insurance policies are still listed in dollars or other fiat currencies makes it difficult to determine coverage details in a world where digital assets have volatile values. Also, many of the risks that exist today in the crypto industry are known but can’t necessarily be quantified. How often is an exchange hacked? What is the average amount of funds lost? Unknowns like bugs in code also exist. Insurance policies, for any industry, are based on predictable risk. The entire crypto industry is new and lacks predictability, making it harder to insure. With time, however, crypto insurance will hopefully become more practical and transparent as the market matures and more coverage options are available.