Insurance covers damage caused by things that are hard to predict, and cryptocurrency insurance is the same. Cryptocurrency is very volatile and is often in the news because it is the target of hacks that cost millions of dollars and cause investors to lose millions of dollars and the sector to lose billions. According to Reuters, hackers stole about $615 million from a blockchain project linked to the popular game Axie Infinity and $23.3 million from Ronin, a network that makes it easy to move crypto coins between different blockchains.
Chainalysis said in its 2022 Crypto Crime Report that “cryptocurrency-based crime hit a new all-time high in 2021, with $14 billion going to illegal addresses, up from $7.8 billion in 2020.”
Unlike fiat currencies like the U.S. dollar, the euro, or the Mexican peso, cryptocurrencies are not backed by governments, and there is no protection built in to stop theft or loss of those funds. The Federal Deposit Insurance Corporation (FDIC) of the United States protects banks and thrifts from losses of up to $250,000.
But cryptocurrency doesn’t have this kind of protection.
The Wave of Crypto crime
To stop this wave of cryptocurrency theft, exchanges like Binance and Coinbase say they will cover investors’ digital funds if they are stolen. But that won’t help if someone tries to get you to give up your passwords and login information.
“Coinbase has crime insurance that protects some of the digital assets stored in our storage systems from being stolen or lost because of a cybersecurity breach or other crime.” However, our policy does not cover any losses caused by unauthorized access to your personal Coinbase or Coinbase Pro account(s) due to a breach or loss of your credentials, “the site says.
The Secured Asset Fund for Users was set up by Binance in 2018. (SAFE)
To protect the money of its users, it put up some trading funds. In 2019, Binance was hacked and lost $40 million. The company said that the hack did not hurt investors. The company says that the loss was paid for by its SAFU.
Insurance companies for cryptocurrency may cover some of the losses caused by hacks and thefts to make up for some of the stolen balance, but neither investors nor exchanges will get all their money back. Most policies don’t cover losses caused by changes in the cryptocurrency market or if an investor joins a “get rich quick” scheme that turns out to be a Ponzi scheme and loses all or part of their investment. It also doesn’t cover the direct loss or damage of hardware, the transfer of cryptocurrency to a third party, or the disruption or failure of the blockchain that backs the asset.
A few crypto-insurance companies
Some insurance companies, like Lloyd’s and Relm Insurance, are starting to offer crypto insurance. Some insurance companies only cover crypto exchanges because that’s where the most money is.
Even though Coin cover is not an insurance company in the traditional sense, it does offer a technology and software solution for individual protection that tries to stop crypto businesses from losing crypto due to theft or human error. It protects digital assets from hacking, phishing, malware, device theft, Trojan software, and brute force attacks. The company says that because of its technology, it can make up for mistakes when they happen.
Elliot Maule, a senior manager in regional communications at Lloyd’s, says that the company has written “a small number of policies” for cryptocurrencies in the past few years. He also said, “Since this is a new area that is changing quickly, Lloyd’s does ask syndicates to move forward with caution and more underwriting scrutiny.”
Lloyd’s has recently started working on crypto insurance projects. In 2021, they will release a new insurance policy called Lloyd’s Product Launchpad to protect cryptocurrency held in online wallets from theft or a hack.
As of June 20, 2022, the crypto company BitGo offers a $250 million policy that covers digital assets wherever it holds private keys. Losses are covered by the policy if private keys are copied and stolen, if someone on the inside steals them, if BitGo employees do something dishonest, or if executives lose their keys. Lloyd’s Syndicate is in charge of BitGo’s insurance.
Lloyd’s also introduced the first-of-its-kind liability policy. It was made by Lloyd’s syndicate Atrium and Coin cover to protect against losses caused by the theft of cryptocurrency held in online “hot wallets.” “The policy has flexible limits starting as low as £1,226,” said Maule.
Insurance policies aren’t good enough.
Insurance companies still have a long way to go before they can offer solid, affordable policies that will pay people back for their lost crypto investments. “The main problem with crypto insurance is that it doesn’t cover everything,” says an article from Zeno. People who own crypto assets must mix and match different plans to fully protect all of their crypto assets. They would need one plan to protect against losing private keys and another plan to protect against mistakes in smart contracts. If their wallet company ever went out of business, they might need a third to protect themselves.
How dangerous is it to invest in cryptocurrencies?
It is risky to invest in cryptocurrencies. Even the most well-known cryptocurrencies have prices that change a lot more than the prices of things like stocks. Regulatory changes could also have an effect on the prices of cryptocurrencies in the future. If this happens, cryptocurrencies could lose their value. There are also cybersecurity risks for cryptocurrency funds, such as hacking and theft.
Is the FDIC able to protect cryptocurrency accounts?
No The Federal Deposit Insurance Corporation (FDIC) protects checking and savings accounts in the United States against losses of up to $250,000. However, there is no such protection for cryptocurrency.
Is it possible to get insurance for investments in cryptocurrencies?
Some insurance companies are selling policies that only cover cryptocurrency funds up to a certain amount if they are stolen. But only in certain situations do the insurance policies that are available payout for stolen cryptocurrency funds. Most policies don’t cover losses caused by changes in the cryptocurrency market. They often don’t protect against direct hardware loss and damage, the transfer of cryptocurrency to a third party, or the disruption or failure of the blockchain that backs the asset. Most likely, crypto investors would need to buy more than one insurance policy to get better coverage.
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