Policy

Frequent cryptocurrency theft gives rise to new area of insurance

But crypto-insurance is so new, many regulators aren’t sure how to treat it

The D Las Vegas advertises in January 2014 that it now accepts bitcoin. (Ethan Miller/Getty Images file photo)

Hackers stole $1.7 billion worth of cryptocurrency last year, a massive rate of theft and a big hit to the financial technology’s reputation.

A rising industry could mitigate the problem: crypto-insurance, which offers the promise that big financial firms will feel secure enough to take wider stakes in financial products based on bitcoin or other cryptocurrencies.

The idea is so new that many regulators aren’t sure how to treat it, with some deciding such insurance generally falls outside their purview, meaning it’s buyer beware for companies or consumers that rely on this coverage. At least for now, there’s little oversight.

Crypto-insurance is billed as the way to address a huge reputational problem. The value of all cryptocurrency totaled about $130 billion worldwide in late February, according to website CoinMarketCap. The $1.7 billion stolen last year, an estimate from cryptocurrency tracking company CipherTrace, means hackers made away with more than 1 percent of the cryptocurrency in existence. That would be equivalent to bank robbers stealing about $1 trillion from the world’s banks in 12 months, based on U.S. government estimates on how much money exists in the world.

The high rate of theft has factored into federal regulators’ reluctance to approve bitcoin-based funds, with the Securities and Exchange Commission saying that such theft will inevitably create too much volatility in the market.

Most recently, bitcoin enthusiasts are reeling over the collapse of Quadriga Fintech Solutions Corp., formerly Canada’s largest cryptocurrency exchange, which said it was unable to locate $190 million in digital assets after the exchange’s founder — and the only one to possess the code to access the funds — died unexpectedly in January. That’s not classified as theft, but the outcome is the same: The virtual currency is believed to be forever lost.

That’s the kind of situation that a startup known as BlockRe is looking to address. The Chicago-based company, which launched in 2017, calls itself the first ever digital asset insurance and risk mitigation company, though it’s clear other more established insurers are offering some form of crypto-insurance as well.

Raymond Zenkich, BlockRe’s co-founder, said his company partners with 12 active insurance companies in providing coverage for “crypto asset related risk around the custody of private keys.” The company serves as a specialized type of broker in finding tailored policies for companies.

Insurance is largely regulated at the state level, making it an odd fit for cryptocurrencies, which are designed to transcend even national borders. Various state panels are aware of crypto-insurance, but many are taking a hands-off approach.

The New York attorney general’s office wrote in September that the use and extent of insurance in virtual currencies is “not well understood.”

“In light of the uncertain landscape concerning whether, and how, virtual currencies are insured, customers should demand more information from their trading platforms about how risks to virtual or fiat currency are insured against,” the office said.

Views vary by state. Ohio regulators, for example, say they’re aware that insurers can provide cryptocurrency-related coverage, but they don’t track who is offering it. While in Pennsylvania, cryptocurrency coverage might fall under its filing requirements, depending on how it’s offered.

“We are aware that this type of insurance exists but we have not seen any reference to cryptocurrency here in Pennsylvania,” the department said. “If it is offered as a large commercial product, it would be exempt from filing requirements but if it is offered as a small commercial product or a personal line, it would have to be filed through our department.”

California’s insurance department said it “would certainly review any cryptocurrency insurance program filed by a licensed and admitted insurer.”

A representative from the National Association of Insurance Commissioners said the organization has not spent time looking at insurance for cryptoassets.

But BlockRe’s Zenkich said regulation of cryptocurrency insurance is “inevitable.”

“There’s a clear need for some basic level of regulatory authority,” he said, adding that some regulators have expressed interest in moving toward insurance products that will help protect small investors.

That would certainly be more comprehensive than the business policies being offered in places like Florida and Texas, where, according to state regulators, insurance companies have coverage offered as add-ons to existing policies.

Texas regulators said established insurers offer several options, one a commercial crime policy of the kind that typically protects against behavior like forgery. Another broadens the definition of property to include theft of bitcoin, making employee theft of it eligible for coverage, but only if the theft occurs from what’s known as cold storage, the department said. Cold storage is a digital wallet that’s not connected to the internet, perhaps stored on a hard drive, meaning it’s theoretically safer, though the Quadriga lost key was for currency kept in cold storage.

Individual consumers may not have ready access to such third-party coverage. The federal government has programs to protect consumers’ bank accounts, through deposit insurance, and investments, through the Security Investor Protection Corp. Neither apply to cryptocurrencies. While some digital tokens have been deemed to be securities by the SEC, cryptocurrencies are considered commodities by U.S. regulators and are largely unregulated at the federal level.

But individuals, known as “retail” investors in the financial industry, are getting some protection from cryptocurrency companies themselves. Those include the exchange bitFlyer, which the New York attorney general said has been outspoken about developing insurance products to protect against risks to customer transactions, and Coinbase, which told the attorney general’s office that it has insurance for the virtual currency transacted on its exchange.

BitGo, a cryptocurrency custodian, offers for no charge “comprehensive” insurance up to $100 million for its currencies kept in cold storage. That insurance is through a blue chip company, Lloyd’s of London Syndicate of Insurance Companies, the company said.

BitGo’s operations director, Rodrigo Vicuna, said business clients will also be able to purchase theft insurance and something called Lost Key Cover, to recover the unique keys to access cryptocurrency, through Digital Asset Services, an insurance provider overseen by the U.K.’s financial services regulator.

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