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Crypto Insurance: What Is Crypto Insurance, And How Does It Work?

Last modified: Jul 24, 2023

Crypto insurance protects against losses associated with cybersecurity breaches. Most cryptocurrency exchanges provide at least some insurance to protect digital assets against losses from security breaches and theft.

In this article, we’ll talk in detail about crypto insurance, how it works, and what it covers. So, if you’re curious to know more, read on!

The History of Crypto Insurance

Lloyds of London was the first insurer to offer liability type of crypto insurance with flexible limits of as little as £1,000 (appr. $1,353). It was co-created by Lloyd’s syndicate Atrium in conjunction with Coincover to protect against losses that could arise from the theft of cryptocurrency held in online wallets.

This type of insurance policy has a dynamic limit that increases or decreases commensurately with the price of crypto assets. Put another way, the insured will always be indemnified for the underlying value of the insured asset, even if this fluctuates over the policy period. 

However, it’s essential to note that cryptocurrency is not legal tender in America because it’s not backed by the government. Therefore, cryptocurrencies including Bitcoin, Litecoin, and Ethereum are not subject to Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation protections.

What Is Crypto Insurance, and How Does It Work?

Usually, investors in the United States who own conventional securities, such as bonds or stocks, have insurance backing from either the US government or their private insurance policies. However, crypto investors in the United States do not automatically have those same protections.

That’s where crypto insurance steps in to provide cryptocurrency owners with protection for their investments.

Currently, there is a growing demand for cryptocurrency insurance, especially for the events like theft. However, the biggest issue for insurers is the underwriting process when solid risk assessments become complicated due to a lack of cohesive regulations within the crypto-insurance industry. Some newer and more forward-leaning startups have been more proactive in this area, but Stateside, for example, is still very much a case of “dipping toes into the pond” more than it is a straight dive.

So if the industry, which is still developing, is so unpredictable, how is it possible to know that your cryptocurrency is safeguarded at all?

This is where companies like Gemini Crypto Insurance could offer some guidance. According to Yusuff Hussain, Head of Risk at Gemini in New York:

“To date, insurers have been hesitant to insure the crypto industry due to a large number of high-profile hacks that have resulted in catastrophic losses over the years, and the poor security standards, internal controls, and policies and procedures that have unfortunately characterized much of our industry. As a result, many crypto exchanges and custodians have been either (i) unable to obtain insurance or (ii) shied away from it due to the high cost of premiums required by the few insurers willing to insure the industry.”

“However, we were able to successfully demonstrate to insurers that Gemini, a New York trust company, is indeed a safe and secure exchange and custodian where customers can buy, sell, and store digital assets in a regulated, secure, and compliant manner.”

How this insurance works depends entirely on individual companies prepared to take on underwriting and insurance of the actual digital assets.

For example, a company like Coinbase Crypto Insurance says that: 

We are building the crypto-economy – a more fair, accessible, efficient, and transparent financial system enabled by crypto.”

“We started in 2012 with the radical idea that anyone, anywhere, should be able to easily and securely send and receive Bitcoin. Today, we offer a trusted and easy-to-use platform for accessing the broader crypto-economy.”

And they’re not taking this lightly! They have approximately 73 million verified users, 10,000 institutions, and 185,000 ecosystem partners operating or living in over 100 countries. In addition, they have $255 billion in assets on their platform.

Now, how this works is wonderfully simple and complex — all at the same time. While cryptocurrency is not legal tender in the United States, the money used to purchase crypto is, and it could be in American Dollars, Euros, British Pounds, etc. That form of legal tender used to acquire the digital asset becomes part of the risk portfolio that insurers will assess when deciding on whether or not to underwrite and take on an insurance policy.

What Doesn’t Crypto Insurance Cover?

Again, this is heavily dependent on the insurer, but generally, the policy won’t cover direct hardware loss and damage and transfer of cryptocurrency to a third party. Plus, it won’t protect against disruption or failure of the blockchain underlying the asset. 

What Does All of This Mean for Crypto Insurance?

Well, for starters, no matter how much the inventors of cryptocurrency have been avoiding regulation like the plague, at some point, governments and regulatory authorities are going to make an impact. CEPS, a leading European think tank, recently reported that:

“The EU is proposing a specially dedicated regime for crypto-asset providers in the EU through the MiCA regulation, the first international bloc to do so. When adopted, only licensed providers will be allowed to offer crypto-currency and operate crypto exchanges in the EU.”

So ultimately, insurers will be looking for greater regulatory clarity in the coming years before extending coverage further for more competitive pricing points, and they’re going to have to get there relatively quickly too. 

Digital assets are hardly a new phenomenon, and if we’re going to include crypto under that umbrella term (and we do), then insurers, and yes, even bankers (sacre bleu!), will have to get in on the action if they want to take part in a market that will only grow and become even more lucrative.

But why are insurers so reluctant? This is down, at least in part, to the ever-changing regulatory landscape. In January last year, the Office of the Comptroller of the Currency (OCC) granted a national trust bank charter to a South Dakota trust company. This made it the first digital asset bank in the United States. What that means is that government insurance and backing will have to start following suit — which in itself raises some very interesting questions regarding taxation and capital gains taxes in inheritances and wealth transfers.

Even the SEC (the Securities and Exchange Commission) has now also gotten in on the action, so to speak, as they have now clarified how broker-dealers must operate when acting as custodians of digital asset securities so that they don’t get into trouble with law enforcers.

Can You Purchase Personal Crypto Insurance?

Yes, although this is not as simple as a one-word answer. “Most crypto assets are not currently covered by insurance, and that’s due to the relative immaturity of the cryptocurrency market,” says Brian O’Connell, an insurance analyst at Insurance Quotes.

The largest section of the cryptocurrency insurance market is more likely to be held by the exchanges that trade in cryptocurrencies than individuals doing the trading. So, you’ll have to check with your platform directly to see if you are covered as a crypto purchaser when trading on that particular platform.

Why Does Cryptocurrency Need Insurance?

A very interesting article by AON that details cryptocurrency insurance reported that more than $1.3 billion had been stolen from exchanges since the first Bitcoin block was mined back in 2009, with an average of $2.7 million of assets stolen daily in 2018. Therefore, insurance is essential in helping reduce the risk for anyone wishing to hold digital assets.

Criminals, of course, have seen the endless potential for moving vast amounts of cryptocurrency instantly as misappropriation is incredibly easy. With regard to cash, one has to steal it, and there are obviously limitations on how much can be taken. Besides that, cash can be traced or, as was the case with the vault theft from a Northern Ireland bank some years ago, reprinted with a new design with the former being rendered useless and no longer legal.

As far as crypto is concerned, a potential thief just has to hack into the key details of a crypto holder and digitally transfer however much they wish straight into their anonymous account. 

Regarding the best crypto-insurance provider, you’ll have to figure that one out for yourself. But Lloyds seems to be at the top of the list, with AON cryptocurrency insurance making some interesting waves too. Be sure to check out Coincover as well, another British-based company that offers a range of insurance protection and products.

Crypto Insurance Financing

One must remember that the сryptocurrency business consists mainly of startups and exchanges. It’s simply not big enough to provide revenue for the insurance industry yet. Even North America’s biggest exchange Coinbase holds just 2% of its coins insured with Lloyds of London.   

What is very interesting about the safe storage of these coins is that while some are held in hot storage — in other words, in locations connected to the internet, many are disconnected from the internet. So no one can really ascertain their insurance status. 

Bringing It All Together

There is no getting away from it; cryptocurrencies will change the way we understand and interact with money. They’re going to have an impact on how we secure our financial future sooner rather than later. 

But what about private crypto insurance for individuals? Well, it seems that while some companies are evolving to offer private crypto insurance, the levels and extent to which they do so differ immensely.

Our advice is to start small. Build your portfolio skillfully and patiently using credible exchanges, and don’t be sucked into “too good be true” promotional deposits that promise huge profits.

Insurance started with Lloyds of London in 1688, insuring British merchant shipping companies against piracy and loss due to sinking and storms. It makes sense that they’re continuing the evolution of insurance into this brave new world. While it does appear that the EU and Asia are somewhat ahead of the game, with Elon Musk’s recent enthusiastic endorsement of Bitcoin, we’re in exciting times indeed.

Policy Advice is a website devoted to helping everyday people make, save, and grow money. While our team is comprised of personal finance pros with various areas of expertise, nothing can replace professional financial, tax, or legal advice.

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