5 Reasons Why It’s Hard to Insure Cryptocurrency Operations and Best Practices to Still Obtain Coverage
How do you insure something with little historical data, a price that could be up or down by 25%+ next month, a reputation associated with criminality, a base of anonymity, an extreme supply/demand mismatch, and great regulatory uncertainty?
By now, you’ve surely guessed that we’re describing the challenges of insuring cryptocurrency.
Despite these high hurdles, crypto remains wildly popular. It’s also inherently risky. Consequently, it’s an asset that must be insured, and yet, only a tiny fraction of businesses and individuals active in the cryptocurrency markets have insured their risks.
Let’s look more closely at the challenges of obtaining coverage:
1) Lack of Historical Data
Because cryptocurrency is so new, it doesn’t have much of an actuarial track record, making it inherently difficult for insurance underwriters to assess and price risk. Unlike insuring a home or vehicle, insurers have little historical data on which to base the likelihood of loss.
For instance, how can an insurer accurately predict the chances of a hacker breaking into someone’s private wallet and stealing crypto assets without knowing what weak or strong operational controls look like?
2) Price Volatility
Cryptocurrency is among the most volatile of assets, including both the wild price swings of Bitcoin, Ethereum or other crypto products and accounting for foreign exchange ups and downs. It’s extraordinarily difficult to assess insurance pricing with that degree of price volatility in the underlying asset.
A major plus for many crypto users is their belief that it is anonymous.
Some of those people or entities might be engaged in illegal activities, such as drug smuggling, conducting ransomware attacks or other questionable or suspicious activities. Others might simply follow a Libertarian philosophy of decentralization of government and corporate power.
In fact, crypto is pseudonymous since the blockchain technology allows for public tracking of every move, but the legal names of those participating are hidden to participants by account numbers or wallets. The well-known crypto brokerages comply with anti-money laundering and know your client procedures that are ubiquitous in the traditional financial services industry.
Regardless of the reason for desired anonymity, it is a core aspect of cryptocurrency’s popularity. But pseudonymity is incompatible with how many insurance policies function. How can you provide proof of loss if you can’t prove who owns an account that the asset was moved to?
4) Lack of Availability and Misperceptions About Price
For all of the reasons listed above, including the great need in obtaining crypto insurance and the inherent difficulty in providing it, there is an extreme imbalance between supply and demand, which adds to the challenges surrounding availability and pricing.
Compounding that, there is a major disconnect between the perception of how much insurance premiums for cryptocurrency firms should cost and the insurers’ views of appropriate pricing for products such as directors and officers insurance.
Insurance pricing is significantly higher than many people are willing or able to pay, which leaves many cryptocurrency companies and investors uninsured and fully exposed to risk.
5) Regulatory Uncertainty
Adding to everything else, the regulatory landscape is new and evolving.
The U.S. Securities and Exchange Commission has proposed a comprehensive plan aimed at regulating Treasury markets platforms, which could include cryptocurrency trading. The Commodity Futures Trading Commission on the other hand wants to regulate digital assets as commodities.
Insurers understandably want to see what the crypto regulations will entail and assess their potential impact.
How to Make It Easier to Get Crypto Insurance
In the face of these challenges, the best way to secure appropriate and affordable coverage is for cryptocurrency participants to tell a compelling story to potential insurers.
Cryptocurrency companies and investors need to clearly explain what they do.
- How do they operate and make money?
- What is their specific crypto involvement and precise insurance need?
- What are they doing operationally to lower risks?
- What measures are they taking to prevent cyber crime?
Cryptocurrency is still new and represents a huge opportunity for many people and organizations. The insurance industry and government regulatory bodies are on a learning curve along with everyone else. Given the ongoing and growing need, expect demand for and supply of cryptocurrency insurance to grow in the months ahead as we all grapple with the various challenges. &