Cryptocurrency is a nascent industry with few well-known players and no mainstream consumer adoption. There are however, some companies providing crypto insurance services to protect their investors from the risk involved in investing in cryptocurrencies.
The “insurance cryptocurrency coins” is a term that refers to the increasingly acute need for crypto-native insurance. The need for this type of insurance is due to the fact that many people are beginning to invest in cryptocurrencies, which can be seen as a risk. This article will discuss how crypto-native insurance works and why it is important.
The insurance sector has a long history of supporting key technological advancements. It’s no accident that the modern insurance sector began at the same time as the industrial revolution. Indeed, it has been successfully claimed that the introduction of fire and property insurance, in reaction to the Great Fire of London, greased the gears of capital investment that propelled the industrial revolution and was most likely the reason it began in London. Throughout the first and subsequent technological revolutions, insurance has provided as a safety net for inventors and investors, as well as an impartial outsider validator of risk, providing both the incentive and the security required to boldly test and overcome boundaries.
We are now in the middle of a new digital financial revolution, and the argument for this new technology is strong. The recent White House executive order on “Ensuring Responsible Development of Digital Assets” reinforced this point and served as a watershed moment for the industry, elevating the debate over the technology’s importance to the national stage and acknowledging its importance to US strategy, interests, and global competitiveness.
The absence of cryptocurrency insurance
However, given that current crypto insurance capacity is projected to be about $6 billion — a drop in the bucket for an asset class with a market value of nearly $2 trillion — it’s evident that the insurance business is falling behind and failing to fulfill its critical role.
In December’s House Financial Services Committee hearings on the condition of the market, this conspicuous absence of insurance protection for digital assets was especially mentioned. If the current state of things continues, future growth and adoption will be hampered.
Why, despite the clear need and potential, have conventional insurers resisted joining this market?
The significance of the change from Bitcoin maximalism to Bitcoin reality
Traditional insurers confront three major roadblocks when it comes to reacting to the new risk class that bitcoin presents. The most fundamental of these is a lack of knowledge about this frequently perplexing technology. Even when technical knowledge is there, issues such as appropriately identifying new and complex risk categories — such as those connected with hot, cold, and warm wallets, and how many technological, business, and operational aspects impact each of these – persist. The issue is exacerbated by the industry’s fast evolution, which is arguably best demonstrated by the apparently overnight creation of new and often perplexing risk classes, such as nonfungible tokens (NFT).
Of course, many insurers are still licking their wounds from the early dot-com days when they rushed to write cybersecurity policies without properly comprehending the dangers and the massive losses that usually occurred.
Meanwhile, Chainalysis estimates that $3.2 billion in cryptocurrency was stolen in 2021. That amount is enough to give any reputable financial institution contemplating actual engagement in this market severe heartburn in the absence of risk mitigating solutions. In comparison, each year, US banks lose less than $15 million to currency thefts. One reason why bank robberies are so uncommon and ineffective (with a success rate of just around 20% and average payouts of just over $4,000 per event), is because most U.S. banks must qualify for blanket bond insurance, which necessitates security measures meant to reduce these losses. In this sense, insurance not only minimizes the risk of robbery losses, but also fosters an atmosphere where such losses are much less likely to occur in the first place.
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The need for cryptocurrency insurance
The same may be said for insurance against crypto asset loss. Because the underwriting procedure imposes such a high degree of interdisciplinary expert scrutiny and compliance requirements, the commodities carried in insured wallets are not only safeguarded, but are also significantly less likely to be lost in the first place.
It is self-evident that crypto asset insurance is both necessary and beneficial. However, given the current conditions, conventional insurance is unlikely to step in to remedy the crypto asset risk issue on a timely basis. Instead, the answer will have to come from inside. We need crypto-native solutions that are adapted to the demands of the sector and have the flexibility to address the complete range of crypto asset risks, goods, and services, including NFTs, decentralized finance protocols, and infrastructure.
The benefits of in-house risk management are many.
Dedicated crypto insurance businesses, for example, have more industry knowledge and experience, allowing for higher-quality coverage, which translates to enhanced security and safety for the whole crypto sector. Crypto-native insurance businesses would be able to create risk mitigation solutions with the flexibility to address the industry’s unique and fast changing demands if they had this degree of awareness. Then, once in place, these companies might boost insurance capacity by billions of dollars by collaborating with established insurance companies. Finally, a specialized crypto insurance industry would better fulfill legal and regulatory standards, guaranteeing that the absence of insurance does not stymie crypto acceptance or expansion.
What’s stopping crypto-native insurance solutions from stepping forward to fix the issue in light of all of this?
Ironically, in the case of crypto asset insurance, the industry is largely opting to invest in the same crypto projects whose future sustainability would be harmed by a lack of insurance capacity arising from a lack of investment in the field.
It is evident that we are in the middle of a new technology revolution. The fact that insurance has played a critical role in assisting previous technological revolutions in realizing their full potential is also significant. The current state of crypto asset risk protection is unsustainable and creates an unacceptable risk. The crypto community must realize the dangers presented by the current state of affairs, which includes a serious lack of crypto asset insurance choices.
The good news is that we came this far by overcoming apparently enormous technical and economic challenges on our own, and we think we can do it again.
Sofia Arend and J. Gdanski collaborated on this paper.
There is no financial advice or suggestion in this article. Every investing and trading choice has risk, and readers should do their own due diligence before making a decision.
The author’s views, ideas, and opinions are entirely his or her own, and do not necessarily reflect or represent those of Cointelegraph.
Sofia Arend is the Global Blockchain Business Council’s communications and content head (GBBC). Sofia worked for the Atlantic Council, a top ten global think tank for military and national security, before joining the GBBC. Sofia earned a Bachelor of Arts in International Relations and Global Studies with honors from the University of Texas at Austin, where she was recruited for NCAA Division I rowing.
J. Gdanski is a privacy, security, and risk-management specialist, as well as the CEO and creator of Evertas, the first firm devoted to crypto asset and blockchain system insurance.
The “coincover” is a new insurance company that specializes in crypto-native insurance. It uses blockchain technology to create a decentralized platform for insurers and policyholders to interact.
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