More and more industries are turning to crypto to facilitate business transactions. There is a lot that could go wrong. We look at how to keep your assets safe by purchasing cryptocurrency insurance. Many people have compared the crypto market to the wild West, as there is little regulation. Crypto allows ordinary people and businesses to bypass traditional intermediaries. It enables people to make cheap transactions. So what does the future hold when there is such little regulation? Are assets safe, and what can be done for their protection? We look at crypto-insurance and what this will mean for the crypto world.
The current state of the crypto market
It is straightforward for businesses and people to benefit from quick and simple payments. People can remove any obstacles that put SMEs in the wrong position. It happens when major corporations are trying to compete. Cryptocurrencies are significant, as you don’t need banks for transactions. The result is a reduction in processing fees, which can cost people a lot of money.
A small or medium business’ sales occasions can be increased by crypto. It can be done by leveraging its acceptance as a global trade medium. Exchange rates between countries, buyers, and sellers may vary with traditional currency transactions. They can take many days to process.
In contrast, cryptocurrency moderates this sort of risk. Funds are transferred, and crypto has its exchange rate. It can be an additional risk if the currency becomes prone to fluctuating value. You can think of cryptocurrency as a bearer asset. It means that owning a bitcoin or some other unit of crypto establishes ownership, just like conventional cash does. The possessor is entitled to the value of its currency.
However, when somebody steals a bitcoin, it makes it very difficult to establish who owned it if authorities don’t know who possessed the bitcoin in the first place. Theft is a large risk for any currency like this. You can look at countless examples of crypto theft all over the media, such as the following:
- Mr. Gox lost over $450 million in 2014
- Bitfinex lost 120,000 bitcoins in 2016
- Coincheck lost over $520 million which belong to their customers in 2018
- Hackers managed to steal over $1 billion of bitcoin in the first three quarters of 2018
There are also other risks around. They can range from technical glitches to human errors. Even price volatility can have harmful results. Many investors in crypto have looked towards ways of protecting their assets. It is why many companies and consumers are looking towards crypto-insurance to protect from the damage of potential theft. Unsurprisingly, a lot of insurance companies are now looking at charging premiums to cover potential losses of crypto assets. It is a market that is undoubtedly going to grow in the future rapidly.
The need to attract institutional investors
If more people are going to be investing in the crypto center, insurance needs to be provided. You can look at a good example. The recent exchange of Gemini launched a captive insurance company. This company has worked to ensure the crypto exchange for losses of up to $200 million. It is the most significant amount to date for any crypto custody service on the planet.
Gemini’s institutional clients will be able to meet all of their regulatory requirements with ease. It’s no surprise that the company is insuring such large amounts. It is a company that prides itself on putting security first while creating an environment that is compliant and friendly with customers.
In light of all of the risks and the fastly chaotic world of digital currency, the crypto sector is crying out for solutions, and traditional insurance is one of them. It is this kind of coverage that protects far beyond thieves and hackers; for instance, many companies will provide coverage to account for risks with price volatility. It is a brilliant thing. It can protect companies from gyrations in the market. For example, when the price of bitcoin drop by ⅓ two years ago, there could be some compensation for this.
A company called Equilibrium has recently explained that the world’s crypto community needs to have reliable insurance solutions. They have spoken out in praise of such solutions because Black Swan events, unusual events, and fluctuations need to be accounted for.
It is not as if an unusual event needs to be catastrophic. As an example, South Korea could decide to shop all of its exchanges down, or United States regulators could suddenly decrease their hammer on bitcoin.
Equilibrium has been looking at matters slightly seriously. They have recently created stability funds that protect all of their users from strange and extraordinary market events. Those that use their stablecoin can now have added peace of mind when thinking about the protection of their assets.
The CEO of Equilibrium, Alex Melikhov, recently explained that users purchase their coin, expecting the price to remain stable and not fluctuate. When extraordinary market events happen, this tends to affect the amount of all cryptocurrencies, including theirs, so the cost of bitcoin decreasing could as an example lead stablecoin to plummet.
Users of this currency could find that in an instant, their assets could become liquidated. Mr. Melikhov believes that if something unusual were to happen such as a fluctuation that will cause the value of their currency to decrease any overall system collateral value to reduce below the cost of stablecoin supply, their smart contract-based fund could step in in order to algorithmically ensure that all users of the currency will be able to maintain their value.
The protection of users
It isn’t only Equilibrium that is trying to implement self-capitalized funds to ensure the protection of their users. Other leading exchanges are trying to do it too. 2018 saw Binance announcing that 10% of all trading fees would be put into an asset fund. It would be stored in a separate cold wallet cryptosystem. It would then protect their uses and funds when extreme events occur.
Almost a year later saw hackers stealing over 7k bitcoins with a value of over $41 million. Binance used emergency insurance to cover the costs relating to the incident.
Beware of dangers
With all the talk of protection and losses, traditional insurance companies are trying to outsource into the crypto sphere. The last two years have seen many insurance companies branching out and attempting to cover for crypto problems. It usually isn’t very cheap and affordable, yet it is a way that you can protect your assets. The fact of the matter is that cryptos are very precarious and unsettled just by their very nature. There is also a distinct lack of historical loss data, so overall, people need to proceed with caution.
Many more custodians and crypto exchanges are turning towards using traditional insurers and brokers to gain some protection against thieves and hackers. The base revealing details of insurance coverage for crypto holdings exceeds over US$200 million. It was purchased through a broker working for Lloyd’s of London. Gemini, for their part, was assisted by various other brokers and their recent company launch.
Look at last year’s scandal by firm Quadriga. Another crypto security company called Bitgo announced that they had purchased a US$100 million policy to cover any potential mishaps for their digital assets. Many insurance companies are at a much later stage of development and progression than others. A lot is going on in the busy crypto community. Lots of companies are trying to tap into insurance schemes to protect people’s assets. The market is going to grow and grow much further in the future.
The vast majority of companies and organizations will have to sit down and educate all of the upper management levels about crypto. It is not something that is going to happen overnight. For instance, it could take many years. However, many more carries begin to create crypto policies today, and we think that this as a trend that will continue to expand in the future.
How can capital best be used?
Crypto assets have to be handled with a lot of care these days. It is often the case that an exchange set aside some capital so that when mishaps occur, potential losses can be covered. However, there are a lot of problems that can exist with an approach like this. By setting coins aside, this means that you are sacrificing coins that could be potentially invested in. It sparks as not the best use of one’s capital. It is also the case that coverage terms and conditions are often very ambiguous because there is a lack of expertise.
Some companies are looking at forming captive insurance entities, whereby segregated funds are kept in audited and regulated vehicles. This kind of system could help an exchange get a lot more coverage from the reinsurance market. Many companies and people are optimistic about captive insurance options. However, there are some caveats to this.
Every exchange is different, with different ways of being attacked and different kinds of security mechanisms to hold it in place. It will be quite challenging to come up with standardizing industry pricing models without understanding the security methods of each exchange. Exchanges may also not want to share details with their competitors, therefore facilitating a further lack of understanding. Owning insurance may also discourage transfers from investing in security to compensate for the costs of insurance.
The limits to insurance
It’s not possible to easily ensure everything, however. Not every insurance policy will guarantee total security. For instance, no insurance company will fully cover an online PayPal casino if it were to one day lose all of its money. One of the most challenging crypto holdings to insure are assets there are stored in hot wallets. It’s also not possible for an insurance company to provide measures in extreme cases, for instance, if bitcoin goes to 0 in value.
For those users who are worried about their private keys being compromised, it’s essential to look towards particular vendors that will provide added protection. Every investor will want to research every vendor’s reputation and their balance sheet before thinking of entrusting crypto assets towards them.
Insurers require frameworks to price risk, and this is difficult in the crypto community. If you take an exchange, who is the insured’s regulator? Do firms have relationships with this person? What kind of financial position is the company in? Who exactly is on the management team, and do they have experience? These are some of the questions that are difficult and time-consuming to answer.
Companies that have been dealing in crypto have been rapidly evolving. Exchanges today look a whole lot different from those that started many years ago. However, there is usually an audited chief compliance officer employed to seek out any problems with regulators when issues occur. When compliance from the regulator is a priority, a business is going to find it easier to underwrite.
It is difficult to think about the safety of your crypto, especially when there is a lack of worldwide regulation. However, it’s unsurprising that insurance options are becoming available. All sorts of crypto firm insurance policies now exist, and insurance is a hot trend in this financial world. It is without a doubt that the numbers of insurance policies will grow for many years to come to protect many people’s assets.
Are you an avid member of an online crypto community? We’d love to hear your thoughts on cryptocurrency exchanges and what needs to be done to improve them. Do you think insurance will help? Tell us about your thoughts and reflections in the comments section below.
Articles You May Read