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Crypto insurance demand looks set for take off

By Monte Stewart


Updated

Bitcoin on US money
Breach Insurance provides coverage of digital coins stored in crypto exchange wallets - Photo: Shutterstock

Demand for insurance covering bitcoin and other digital coins is set to increase dramatically in coming years, according to the head of a US company selling policies and cryptocurrency proponents.

Boston, Massachusetts-based Breach Insurance offers policies designed to protect retail investors’ digital assets which are stored in crypto exchange wallets.

“This is a major milestone for our industry,” Breach CEO Eyhab Aejaz told Capital.com.

Crypto exchanges are platforms on which investors buy and sell digital assets. Exchange wallets store crypto assets online and offline in the meantime. Hot wallets store assets online in systems connected to the Internet, while cold wallets house the assets in offline hardware devices, such as memory sticks or back-up drives.

Hot and cold wallets covered

Breach’s insurance covers assets stored in hot and cold crypto exchange wallets and transfers of digital coins from a policyholder’s wallet to an unknown wallet.

Breach – a crypto-specific insurance company – was formed in 2019 and began selling policies last month. Aejaz, who is a former Liberty Mutual managing director, launched Breach after becoming interested in the protection of digital assets.

“Demand for crypto insurance continues to go up as the demand for crypto investment continues to consistently go up as well,” Aejaz told Capital.com.

He noted that the cryptocurrency sector’s market cap was about $150bn (£115bn) when Breach was launched and has since risen to a record north of $2.5trn.

Breach’s insurance is intended to increase the protection of digital coins because they are not secured under US Federal Deposit Insurance Corporation (FDIC) or the SIPC (Securities Investor Protection Corporation) coverages. Both of these protect fiat (traditional) money.

Aejaz said the FDIC has drawn a “hard line in the sand” on crypto assets.

Breach is offering coverage in 10 US states and plans to roll it out across the country in the second quarter.

Trisura serves as underwriter

Toronto, Canada-based Trisura Group – an international specialty insurance company – is the carrier (underwriter) of Breach’s policies. Relm of Bermuda is acting as the reinsurer. A reinsurer buys insurance from another insurer to reinsure risks.

Aejaz said Breach’s product differs from other crypto-related insurance because it is backed by a fully regulated insurance carrier and reinsurer. While other forms of crypto insurance exist, they are not regulated or reinsurer-backed, and providers do not have debt ratings.

According to Breach, Trisura has an A- rating from ratings agency AM Best, which specialises in the insurance industry.

Aejaz said the insurance is the first of its kind.

In December 2021, Caiz Holding CEO Ali Cihan Kestir, whose company developed the Caizcoin cryptocurrency that is now trading, told Capital.com that Caizcoin has bought insurance for its digital wallets, providing an extra layer of security for users. But Kestir declined to say which company is providing the insurance.

$75bn of assets stolen

According to Breach, more than $75bn worth of crypto has been stolen to date due to exchange hacks. About $61bn worth of crypto assets stored in crypto exchanges was stolen as a result of 62 hacks between 2011 and 2021. Another $100bn was lost, or became inaccessible, because of self-custody issues, Aejaz told Capital.com, referring to assets that were held outside of crypto exchanges.

Breach aims to provide peace of mind for high-net-worth individuals looking to protect their crypto assets and yields, as well as investors seeking to enter the cryptocurrency investment market. The company was ultimately formed to serve people who believe that regulation and insurance are going to be major drivers of crypto’s stability and growth, said Aejaz.

Policies can cover crypto assets that range in value from $2,000 to $1m. The insurance covers 20 digital coins, including bitcoin, ethereum, and polygon, in the custody at the Coinbase, CoinList, Gemini, and Binance US exchanges.

Gold

2,417.09 Price
+0.390% 1D Chg, %
Long position overnight fee -0.0193%
Short position overnight fee 0.0111%
Overnight fee time 21:00 (UTC)
Spread 0.30

BTC/USD

65,914.60 Price
+0.030% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 106.00

XRP/USD

0.60 Price
+0.120% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168

ETH/USD

3,446.46 Price
-1.100% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 6.00

Breach offers a premium product – Crypto Shield Plus – that insures up to 50% of an asset’s appreciation.

Reimbursed in fiat or digital

In the event of loss, policyholders will be reimbursed in fiat currency or digital coins, depending on the situation, said Aejaz.

He hopes Breach’s coverage sparks competition in crypto insurance.

“It’s going to be good for the industry,” he said. “Competition is validation for the industry and the problem that we’re solving for it. I think it’s going to be really good for the overall health of the industry. It’s going to force us to continue to innovate.”

At this time, Breach is only providing digital coin insurance. Aejaz said the company is conducting research and development on coverage related to non-fungible tokens (NFTs) and decentralised finance (DeFi.)

Wallet insurance makes sense

Chen Li, CEO of New York-based Youbi Capital – which invests in blockchain technologies – said crypto wallet insurance makes sense because people are aware of the risk factors associated with crypto wallets and what kinds of “accidents” can happen.

“I think it’s going to be useful because a lot of people may hold a significant amount of wealth in their crypto wallets, and they may not be familiar with the risk associated with certain behaviours, like using a public WiFi or exposing (their) phone number or identity to strangers,” he said.

Eliezer Ndinga, director of research for 21Shares, said a good way to measure demand for crypto insurance is to look at the crypto market cap.

“The demand will grow definitely in tandem with the growth of the crypto asset class,” he said in an interview with Capital.com.

Headquartered in Zug, Switzerland and New York, 21Shares offers 28 exchange-traded products.

Expansion expected

Other cryptocurrency players, insurance operators, and digital asset sector observers have voiced predictions recently that crypto-related insurance coverage will expand over this year and next.

Insurance is one of the biggest crypto sectors that needs well-thought-out designs, Nndinga added. He noted that many sophisticated investors have lost millions of dollars’ worth of crypto assets through theft, forgotten passwords, lost private keys, or natural disasters that destroyed cold crypto wallets.

Insurance is at the core of everything touched on the Internet today, he said.

But Youbi Capital’s Li noted, “it’s really hard to say” how much demand there will be for Breach’s insurance because it only covers crypto assets held within exchanges.

Questions over demand

“My concern with this line of insurance product is the lack of demand for the service with such a high premium, which is around 2.5% of the coverage per year,” said Li. “The action of holding crypto assets within a qualified exchange is not associated with high risk and does not generate a high yield to justify the insurance cost.”

 In contrast, he said, Defi yield farming, the practice of lending crypto funds to other people through computer programs called smart contracts, is “extremely risky.”

 “And, the risk is often proportional to the profitability,” he said. “Therefore, people are desperate for any tool to mitigate their individual risk.” 

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