Insurance is the key to securing financially important assets. However, the cryptocurrency sector – which is expected to reach a global market size of $4.94 billion by 2030 – may be lagging behind when it comes to securing digital assets.
For example, it has been observed that less than 1% of all crypto investments are currently insured. This statistic is alarming, given the rapid growth and high-risk profile associated with the cryptocurrency market today.
Ben Davis, head of the digital assets team at Superscript – a British start-up and licensed insurance broker from Lloyd’s in London – told Cointelegraph that crypto has been sidelined when it comes to insurance solutions.
“Superscript has spent years focusing on insurance for emerging technology areas. I lead a team that focuses specifically on cryptocurrencies and have never in my career seen an industry more marginalized.” Despite the advancement of the crypto sector, Davis believes that it is still lacking in insurance solutions due to the strong financial focus of the industry. He said:
“Crypto deals with something very basic, which is money. But, as a society, we tend to shy away from that topic. When the tech sector focuses on the hard questions of value and money exchange, underwriters tend to shy away from that conversation.”
The growing need for cryptocurrency insurance
Although this may be the case, the need for insurance solutions within the crypto industry is more important than ever. In order to bridge this gap, Davis explained that Superscript is taking a centralized approach to bridge the gap between traditional insurance providers and crypto companies. We translate the risks associated with digital assets into the broader insurance community. Everyone on our team holds and interacts with cryptocurrency, so we speak the language.”
As a broker at Lloyd, Davis explained that the company has experience bringing clients in front of many insurance companies. As such, the company has a centralized financing (CeFi) approach by offering crypto companies the right insurance providers for their needs. “We work with various immutable token organizations, or crypto companies that partner with big names in the entertainment space, to help secure contracts with traditional insurers. We provide insurance to a full range of digital asset companies including cryptocurrency platforms, and miners. custodians, blockchain developers and more.”
Regarding the operation in question, Davis explained that Superscript helps educate insurance companies on crypto-related risk concerns to ensure they can work with digital asset companies. Like most traditional insurance providers, Davis noted that insurance companies that work with cryptocurrency will take premiums in fiat currency rather than cryptocurrency. “We’re currently looking at ways to innovate by making this process more seamless for our customers,” Davis added.
While Superscript aims to bridge the gap between traditional insurance companies and crypto companies, a number of decentralized financial (DeFi) insurance solutions have paid off. Dan Thompson, chief marketing officer of InsurAce.io — a decentralized financing risk protection protocol — told Cointelegraph that while crypto insurance is broad, it essentially means that crypto users are protected against some risk and catastrophic losses for their portfolios. “It’s a financial insurance tool that emerges in the wake of a multi-billion dollar market,” he said.
In light of this, Thompson explained that InsurAce aims to solve the intrinsic risks associated with DeFi protocols. In order to do this, Thompson mentioned that InsurAce works by allocating the capital that has been stacked into its protocol as an insurance capacity. DeFi users can then purchase this capacity to cover their investment and assets that are restricted in various protocols. “If an exploit occurs, for example, customers can claim via the InsurAce app. The decentralized organization, or DAO, will then vote on the legality of the claims,” Thompson said.
Although this process is different from traditional insurance solutions, it is proven to be effective. According to Thomson, the largest InsurAce payments occurred when the Terra ecosystem collapsed in May 2022.
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“We have received 180 claims in total. InsurAce has paid $11.7 million to 155 affected TerraUSD Classic (USTC) victims.” About 8% of USTC payments to InsurAce were made in stablecoins, while 60% was made up of Layer 1 tokens, and the remaining 4% was made in the platform’s INSUR token. According to Thomson, this process took a month to complete, and is usually faster than payments processed by traditional insurance companies.
Given the decentralized nature of the crypto sector, it should come as no surprise that other projects are focusing on DeFi insurance. Adam Hoffman, founder and CEO of decentralized security protocol Nimble, told Cointelegraph that digital assets must be backed by insurance for the crypto sector to advance. After spending 22 years in the traditional insurance sector, Hoffman founded his company in June 2021 with the goal of creating a more democratic insurance process.
Hoffman explained that Nimble applies traditional insurance concepts to decentralized finance. For example, the platform is built on the Algorand blockchain and serves to secure Algorand-powered DeFi projects. But like traditional insurance providers, Hoffman explained, Nimble is made up of underwriters, claim evaluators, and loss underwriters, all grouped together to help facilitate “risk pools.”
“A risk pool is similar to a liquidity pool, but this includes individual and institutional investors who allocate funds to support risk on insurance. This creates a more democratic insurance process,” he noted.
Hoffman added that Nimble works directly with clients to gather critical information needed for the subscription. This data is then released into the Nimble portal, allowing users to purchase insurance for some of the DeFi platforms.
“If users purchase an amount of cryptocurrency on a platform we support, they can purchase insurance for a price. This premium goes to the risk pool of this project and customers get a non-fungible token in their crypto wallet that is this insurance policy.” In the event of a DeFi hack, Hoffman stated that customers will be notified immediately and receive payments in cryptocurrency directly to their wallets based on the approval of the community and the smart contract.
In fact, democratization appears to be a common theme among cryptocurrency insurance providers. For example, Nexus Mutual is a discretionary mutual company that currently covers millions of dollars in Ether (ETH) for various DeFi projects.
The company’s founder, Hugh Karp, told Cointelegraph that the platform is an automated version of a very old structure where members share risks together. “The main problem that Nexus is solving is the sharing of new and new risks in the crypto space where coverage is not available in the normal market.” According to Karp, Nexus does this by allowing members to decide how to price risks, along with how to pay off claims.
While this approach may be a good fit for the crypto industry, Karp noted that building trust with customers to ensure genuine claims are paid remains a challenge. “This can only be achieved with time and a track record. It’s also difficult to price risk appropriately, and we’ve seen some other crypto insurance platforms have trouble with this recently with the Terra crash.”
Education is critical for DeFi and CeFi security to boot
While some members of the crypto ecosystem view centralized approaches to securing digital assets as harmful, it is clear that both CeFi and DeFi solutions are required. “Traditional CeFi insurers often get a bad rep, but this year alone I’ve seen more traditional insurers enter the crypto space than I’ve seen in the last five years of my career,” Davis said.
This is becoming the case, especially with more institutional investors entering the digital asset sector. “Many companies we insure need financial support from traditional regulated insurance providers,” Davis noted. This idea is also starting to resonate with DeFi providers. For example, Hoffman stated that Nimble is in the process of obtaining an insurance license through the Bermuda Monetary Authority to ensure the protection of DeFi and conventional insurance capital. In the meantime, Hoffman believes it is important for the Algorand Foundation to support Nimble by offering users certification of the platform.
Even with the certifications and credibility in place, securing crypto assets remains a difficult business. For example, a number of cryptocurrency exchanges have come under fire recently for making false insurance claims.
Last month, the leading cryptocurrency exchange FTX received a letter from the Federal Deposit Insurance Corporation (FDIC) accusing the exchange of falsely implying that user funds are FDIC insured.
Moreover, Celsius – the recently bankrupt crypto-lending platform – is facing a lawsuit based on false claims that users’ digital assets are insured. The challenge for the insurance industry is that it can be confusing. Davis said that people, along with organizations, sometimes don’t know what they’re actually covered for. As a result of this, Davis believes that trust within an entire organization or industry can easily be eroded.
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To ensure smooth development proceeds, industry experts agree that more education is needed. For Davis, this starts with educating traditional insurance brokers on how to handle crypto claims. On the other hand, DeFi-focused solutions should focus on helping investors understand what’s covered right from the start.
For example, market volatility can cause confusion. InsurAce is also not a KYC client, however the protocol that their assets are secured by us has been listed on their website. “When the Tira incident happened, customers were not clear about their coverage,” Thompson said. Given this complexity, Thompson believes that the vast majority of insurance coverage will be provided by native crypto solutions.
“The stakes are very new and require deep specialist knowledge, which our members have. Some traditional providers are starting to dip their toes in place, but I suspect they will have some false starts and it will take some time to progress.”