How the insurance industry is starting to tame a wild market
The first Bitcoins, known as the Genesis Block, originally had no value. In April 2010, they were worth 14 cents. Today, one Bitcoin is valued at nearly $23,000.
Bitcoin and its 12,000 other cryptocurrency cousins are ubiquitous and have forever changed the way we buy, sell, and invest. The world has realized the value of a digitized currency, and there is no end in sight to how powerful and valuable it can be. Bitcoin is now the recognized currency of El Salvador and other nations are bound to follow.
There is no denying cryptocurrencies in their many forms are here to stay. The market is wildly enthusiastic about them, but the ecosystem is unpredictable and susceptible to theft and hacking. According to a recent Federal Trade Commission report, nearly 7,000 people lost more than $80 million between October 2020 and March 2021, a 1,000% increase from the previous year. As the crypto market expands, so does the potential for bad actors to do their work.
Government agencies have been reluctant to regulate and insure digital currency because it is both novel and volatile and therefore difficult to define and predict. On the horizon is the Crypto-Asset Policy Sprint Initiative, a partnership between the Federal Reserve and the Office of the Comptroller to understand and design policies to allow banks to better engage in activities that involve crypto assets. It’s a good start, but there is currently no indication whether the FDIC or the SIPC (Securities Investor Protection Corporation) will create protections for cryptocurrency investing.
The market is in a holding pattern.
The government’s reluctance is causing the insurance industry to pause and consider how to address the risk, volatility, and “wild west” nature of these new currencies. Cash, stocks, and bonds are protected by the FDIC or the SIPC, but there is nothing currently protecting cryptocurrency. Because the crypto marketplace is still so new, there is little historical data for insurers to use for prediction purposes. And, because the crypto market is so volatile, the risk of writing policies may be larger than the potential rewards.
A few proactive carriers have dipped their toes into underwriting crypto losses but mainly for large exchanges that hold currencies for major investors. These policies are designed for large exchanges and protect their interest in the currencies. They do not reimburse investors as it is the exchanges’ responsibility to make individual investors whole after a financial loss.
Consumers face different problems with investments in cryptocurrency. They are still susceptible to bad actors, but they also have storage and retrieval issues that larger investors do not. Individual investors are responsible for keeping track of keys that allow them access to their digital wallets. They also store investment information on personal devices, which are often unsecured. Consumers need to have policies that provide coverage of loss from misplaced encryption information, phishing scams, and malware installation.
Carriers and MGAs are actively developing this kind of coverage, but there are currently only limited options for small investors. Coincover and Lloyd’s have partnered to offer smaller, individual policies that protect against hacking, phishing, malware, device theft, trojan software, and brute force attacks. These policies are a start and will likely kick off more robust policies available to consumers at a reasonable cost.
Cryptocurrencies are here to stay, and we will likely see more varieties in the future. But, as people continue to invest in digital assets, the need for comprehensive insurance cover will only increase. The possibilities for crypto insurance are as expansive as the currencies themselves, and the insurance industry will find more and better ways to protect the end insureds.
May 10, 2022