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Insurance capacity for “cold” offline cryptocurrency wallets is more plentiful than for their riskier online counterparts. |
Capacity to insure cryptocurrency assets is growing, but demand continues to outstrip supply, especially in riskier areas of the market.
One of the main types of insurance cryptocurrency lenders and exchanges buy is cover for theft or loss of the private keys they hold on behalf of their clients. The keys are stored either offline in so-called “cold” wallets, online “hot” wallets or hybrid “warm” wallets.
Capacity for providing specie cover for cold wallets is more plentiful, standing at about $900 million per risk, compared with $75 million for hot or warm storage crime cover, according to James Knox, technology and blockchain industry regional practice leader at Aon PLC in New York. Hot and warm storage cover could be increased using captives, co-insurance and other techniques.
While existing hot wallet coverage limits on offer might not match up to clients’ expectations, coverage capacity across the board has increased and that trend should continue over time, according to Ankur Kacker, senior vice president of specie and digital assets at insurance broker Marsh LLC in the U.K. Growth is coming from a combination of existing players offering more coverage as they become more familiar with the risk, and some new entrants, Kacker said in an interview.
“People are getting more confident and are more comfortable with this space and therefore you see more capacity coming in,” he said.
Industrial insurer HDI Global SE, for example, announced in November 2021 that it had developed coverage for U.S. hot wallet provider Hoyos Integrity Corp., allowing Hoyos to extend security guarantees to its customers.
Slow burn
Capacity growth could be slow, particularly for riskier hot wallet coverage. While acknowledging that there have been new entrants into the market for insuring warm and hot storage, Knox said they were offering relatively small coverage limits, with some restricting their capacity to $5 million or less.
A lack of regulation of the cryptocurrency industry means those dealing in cryptocurrency assets may find it more difficult than companies in more traditional industries to obtain coverages such as professional indemnity and directors’ and officers’ liability. But such coverage is available.
“You might not get big limits but you get the coverage for sure,” said Kacker.
New products are also emerging. Lloyd’s insurer Beazley PLC in June launched a directors and officers policy specifically tailored to cryptocurrency companies, offering capacity of up to $10 million. Kacker said further growth of these coverages would be a “slow burn” because they are typically dependent on the regulations of the relevant industry.
The recent steep decline in cryptocurrency prices probably will not have a major negative impact on the cryptocurrency insurance market.
Kacker said there may be some hesitance among new buyers to take up the products in the wake of the crash, but this should be limited in the long term.
“I certainly think clients will come back into the market and continue to buy because the exposures still remain,” he said.
In fact, it appears insurance capacity is still only scratching the surface of what is needed.
“The current insurance appetite can only satisfy less than 1% of the demand,” Hong Kong-based insurer OneDegree Hong Kong Ltd. said in an emailed statement. OneDegree entered this market by offering coverage for private key loss and misappropriation for Hong Kong-based digital asset exchange HKbitEX in November 2021.
Most government agencies have been reluctant to regulate or insure cryptocurrency assets because of their novelty and volatility, according to the Bangko Sentral ng Pilipinas, the central bank of the Philippines.
“Globally, the crypto-insurance sector is still relatively small because of the lack of rules for insuring due to its unregulated nature,” the central bank said in an email.
But there are signs that governments may be willing to take a more hands-on approach in the future. U.S. President Joe Biden in March signed an executive order calling for international collaboration to develop global cryptocurrency standards, and the Council of the European Union and the European Parliament in June provisionally agreed on a framework for regulating cryptocurrency assets.
“If all regulators can come together that will be the next big thing, in my opinion,” Kacker said.