As you would expect, the crypto space is still in its youth, and insurance companies are still debating whether to jump on the train. So far, only a handful allow cryptocurrency insurances with only a $1B insurance capacity in a financial market valued at about $2T.
Like other financial assets with value, cryptocurrency owners need protection from the volatility space, where crypto insurances come in to provide such services. Different companies have different thoughts on cryptocurrencies, and this article shall cover both sides of the same coin. Let’s get to it:
Why Insurance Companies Support Crypto
A good number of insurance companies plan to or already offer crypto-insurance, and these are some of the reasons behind that;
Cryptocurrencies Could Go Mainstream
By cryptos going mainstream, it means being accepted by the larger population. The growth of cryptocurrencies over the past years can be attributed to the increased ability to use them as a payment method. Currently, we can see the trajectory of cell phone payment apps, online shopping, touchless payment systems, among others, all supporting cryptocurrencies.
Financial institutions also offer cryptocurrencies as valid payment methods such as Paypal, Square, and Visa. Paypal provides buying and selling of Bitcoin from their user’s accounts. Square Inc. accepts holding cash reserves in the digital currency, and users can also make payments. Coinbase, on the other hand, says it will soon offer a VISA debit card to allow customers to use their Bitcoin from their accounts on the platform.
Due to cryptocurrencies slowly going mainstream, some insurance companies see it as a chance to join the market as it grows.
Crypto Regulation Efforts
For a while now, cryptocurrencies have been a significant point of discussion for regulators. The decentralized nature of cryptocurrencies sees that any institution does not back them and hence lacks regulation guidelines whatsoever. The main issues they are all targeting. You stop crypto-related crimes and tax evasion, potential investment vehicles such as crypto ETFs and stablecoin regulation.
Crypto regulators globally are trying to protect the investors who are venturing in cryptos, and hence insurances feel safer that the government is looking into cryptocurrencies.
Crime and Fraud are Insurance Issues
According to the CipherTrace study, crypto criminals worldwide ran out for $432 million at the end of April. Approximately 56%, or $240 million, was associated with DeFi, a record high. For 2020 as a whole, fraud and criminal losses have been $1,9 billion in the crypto sector. The record losses for crypto crime in 2019 reached 4.5 billion dollars.
The growth of the business has drawn the bad actors and market participants, saying that the increase in crime would probably escalate as crypto continues expanding. As more funds go to retail and institutional players, bad actors use hype to get consumers into schemes. Hackers will look for projects that have started without proper security audits and exploit weaknesses encoded in the smart contracts.
There are various ways for hacks or scams to occur, and many feel there’s need to ensure their crypto in any way they can. In such an industry, the value of insurance is significant.
Decentralized Finance Growth
Last year, 2020, the DeFi industry exploded with billions in total value locked. This year is no different as the growth has maintained the same pace.
Although DeFi has previously been concentrating on retail-based customer service, it will likely focus on getting more institutional involvement over the next year. With changed administration, regulators may too seek to understand the details of the DeFi space.
For traditional insurance, they cover technological failures and directors’ and officers’ liability. It comes in handy for businesses that want protection for both people in the company and the balance sheet. On the other hand, different DeFi companies tend to differ, making it challenging to use one approach. Consequently, creative insurance solutions can spring from that opportunity.
Why Some Insurance Companies Remain Unsettled?
On the other hand, some are quite skeptical despite these opportunities that insurance companies have. Here’s why;
Lack of Predictability
Based on past experiences, insurance premiums are established. Data about past events are gathered, and the likelihood of undesirable results is estimated using statistical techniques. The problem with cryptocurrencies is that no such calculation data is available.
Companies cannot also predict advances in cyber technology. The insurance firm may decide on a premium based on the present security configurations and cyber-attack vulnerability.
However, technological improvements could change these probabilities. To cover the risks, insurance companies will therefore also need to remain informed about technology changes. Since insurance firms can not perform such ongoing monitoring, not many businesses are ready to provide coverage of crypto plans.
Exchanges Creating their Insurance Programs
One trend slowly growing in the cryptocurrency insurance sector is exchanges creating their insurance funds since their availability is limited.
Each transaction sees a small percentage added to a collective fund, which covers losses by hackers. We will see more self-insurance by exchanges soon. Although the development of commercial insurance products has grown, some exchanges prefer to outsource instead of dealing with the overhead of managing their self-insurance funds.
Currently, the more significant exchanges are offering the most insurance to crypto consumers.
For example, Gatehub offers wallets to investors, which they can use to purchase individual insurance for the entire value of their crypto wallets. Crypto exchanges like Coinbase provide supplementary insurance (backed by Nexus), covering users who lose 10% or more of their crypto assets.
Insurance Companies’ Stance on Crypto: Verdict
Due to the nature of the cryptocurrency market, most companies remain wary of where the crypto market heads. Most are optimistic that it yields good pay, but the lack of precise regulation incentives scares some companies away. However, soon, you can expect that many more insurances covering crypto will come up.
Like stock investments, the insurance of your cryptocurrency’s value does not cover potential loss or depreciation. Investments go hand in hand with considerable risk, so some insurance firms do not want to do so. Instead, the current crypto-insurance protects against unforeseen events. These events include transaction failure and theft, which can prove equally destructive and frequently more rapid than market plummeting.