The need for cryptocurrency insurance policies and coverage

The cryptocurrency market is currently experiencing a boom. In 2019, the global cryptocurrency market was valued at US$754 million and by 2027, the market is projected to reach US$1758 million. The growth is forecasted to happen at a compounded annual growth rate (CAGR) of 11.2% during the forecast period of 2020 to 2027 [1]. As the cryptocurrency market is maturing, it is attracting players from other industries and the insurance industry is one of them. As global markets are becoming more accepting of the unregulated digital currencies, insurance companies are coming up with cryptocurrency insurance policies designed to protect investors against theft, losses and general crypto capital loss.

The interest in cryptocurrencies, especially in Bitcoin, has gone up since Tesla invested $1.5 billion in Bitcoin to use cryptos as a payment option in the future. According to a survey of 1500 adults in the United States by Survey Monkey in association with AAPI Data, 57% of the responders said they plan to buy more Bitcoin in the next 3 months and 35% said they will hold on to what they’ve invested in [2]. The exponentially rising demand is creating and shaping the need for the cryptocurrency insurance market.

The pros and cons of cryptocurrencies

The crypto market has been called the “Wild West” by many, mainly because of its lack of regulation. Cryptocurrency has been essentially created to bypass traditional intermediaries like banks and government regulation so that transactions can happen relatively faster and at a cheaper rate. Cryptocurrency payments can be beneficial for businesses in general. It also provides them in the evening the field by removing obstacles and giving SMEs the upper hand when competing with big corporates. For e.g., cryptocurrencies do not need banks for transaction facilitation which thereby reduces transaction processing fees (which can be expensive for smaller companies.

Additionally, as traditional currency transactions take up several days for processing, exchange rates between seller country currency and buyer country currency might fluctuate while the funds are in process, which might cause loss for either of the parties. Cryptocurrencies diminish against this foreign exchange (FX) risk by both facilitating quicker transfer of funds as well as by offering a third currency with its own exchange rate. However that, in turn, can be a source of currency exchange risk.

There are downsides to cryptocurrency as well. Cryptocurrency is a bearer asset, which means possesion of Bitcoins or altcoins (all cryptocurrencies other than Bitcoin) immediately and effectively establishes ownership, just like fiat currencies. So, when Bitcoins are stolen from someone, it is challenging to establish who is the rightful owner without actual possession of that specific Bitcoin.

The need for cryptocurrency insurance

Yes, cutting-edge security is key to anyone who wants to trade and hold cryptocurrencies. However, cryptocurrency insurance is also helping investors reduce their risks. Buying cryptocurrencies without insurance for cryptocurrency is a big risk. If you’ve been following finance technology news, you might know that several high profile crypto thefts have occurred in the past 5-6 years. Bitfinex, a Hong Kong-based cryptocurrency exchange operated and owned by iFinex Inc., lost about 120,000 Bitcoins in 2016 to cryptocurrency theft. Mt. Gox lost over $460 million to a cyber breach in 2014. Another cryptocurrency exchange based in Japan, Coincheck lost about $530 million that belonged to 260,000 customers in 2018.

A CipherTrace report found that in 2018, $1.7 billion in cryptocurrency was scammed and stolen. Theft from crypto exchanges accounted for most of the criminal activities. Over $950 million was stolen away by hackers in the year 2018, which is 3.6 times more than what was seen in 2017 [3].

As per another CipherTrace report, Moreover, digital asset exchange KuCoin (which is based in Singapore) said that it has detected huge Bitcoin and Ethereum withdrawal to an unknown wallet affecting about $150 million in funds by users. a DeFi (Decentralized Finance) liquidity provider Balancer was hacked $500K in cryptocurrencies. Moreover, the Federal Bureau of Investigation believes that 2 Nigerian influencers that go by the names “Hushpuppi” and “Mr. Woodbery” on Instagram may have been hiding $14 million of stolen funds in Bitcoin [4].

SEE ALSO: 6 Different types of cryptocurrencies and why governments fear them

Cryptocurrency insurance has a future

Risks associated with cryptocurrencies have led investors and users to look for ways in which they can protect their assets. Startups around the world are increasingly seeing cryptocurrency insurance as a promising and lucrative business line. Providers of insurance on cryptocurrency might charge annual premiums that will be equal to between 1-5% of the covered assets. Insurance giants see a great future in cryptocurrency insurance. They have already started adding insurance on cryptocurrency as part of their general policies [5].

Though the demand for crypto insurance coverage and crypto insurance policies is high, the supply is not keeping up with the demand. The cryptocurrency global market capitalization is in excess of $100 billion while there’s just $6 billion available in cryptocurrency insurance coverage [6]. That’s nowhere near enough.

Even Coinbase, North America’s largest crypto exchange, holds just 2% of its cryptocurrencies insured with Lloyd’s of London. These insured coins are kept in hot storage and the rest are disconnected from the internet and honestly, not much is known about their status of insurance.

Cryptocurrency insurance is imperative, considering the instability of its ecosystem and the skyrocketing prices of some of the cryptocurrencies. However, cryptocurrencies present a unique set of challenges for the insurance sector. Usually, insurance premiums are based on past data and such historical data is not present for cryptocurrencies. The high volatility in valuations also affect premiums as it reduces the overall number of coins insured. Lack of oversight as well as uncertainty in regulation in cryptocurrency exchanges and trading platforms further complicate the matter for insurers who are interested in providing cryptocurrency insurance coverage.

Here’s why the cryptocurrency insurance market will flourish in 2021

More clarity in crypto regulations

Digital assets, majorly cryptocurrencies, have been around for decades. The first cryptocurrency Bitcoin was launched in 2009 and yet government entities and financial institutions have largely been reluctant to adopt it. A huge part of this reluctance can be traced to its regulatory landscape which is still developing. However, it is changing rapidly. In January 2021, the Office of the Comptroller of the Currency  granted a national trust bank charter to South Dakota-based chartered trust company, making it the very first federally chartered bank for digital assets in the United States. Moreover, it has also allowed the bank to collaborate with other traditional financial institutions to provide cryptocurrencies to customers.

Moreover, The Securities and Exchange Commission took a similar step by issuing a statement in December 2020. The statement clarified how brokers and dealers must operate when they’re acting as custodians of cryptocurrencies and digital asset securities to avoid enforcement action. A better regulatory framework will help in making traditional insurers more ready and willing to provide cryptocurrency insurance. However, at this point of time where the regulatory environment continues to evolve, more education is needed.

Increased adoption of cryptocurrencies

As the pandemic forced a digital transformation revolution on almost all organizations, it also shed some light on the value of digital assets. Cryptocurrencies are moving quickly beyond their niche market and traditional banks are investing in digital asset projects. Some of the banks are also creating their very own digital currencies. Though most banks are waiting for a “go ahead” from regulators before they publically adopt digital assets, many of them have been preparing for this change internally for years. With more clarity in cryptocurrency regulations and increased adoption, the cryptocurrency market is here to stay and grow. More established and traditional organizations might invest heavily in this field in the upcoming months. When they do, they’d like to see cryptocurrency insurance coverage and detailed policies in place.

Wrapping it up

With increased adoption and regulatory clarity in digital assets by more traditional financial institutions, interest in digital assets will grow and so will its demand. As the growth continues, a major shift in supply will happen over the next couple of years. Organizations that are working with cryptocurrencies need to understand their specific risk exposures and how they can be overcomed. While the cryptocurrency insurance industry seems like a promising field, taking a measured approach to securing crypto insurance is a must. By demonstrating that all potential risks are well-managed and digital assets are subject to institutional grade security, both insurers as well as investors will gain confidence that digital assets are well protected.

SEE ALSO: What is NFT & how does it work – Everything you need to know

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