Insurance is the key to financially protecting important assets. But the cryptocurrency sector — expected to reach a global market size of $4.94 billion by 2030 — may lag behind when it comes to insuring digital assets.
For example, it has been found that less than 1% of all crypto investments are currently insured. This statistic is alarming considering the rapid growth and high risk profile associated with today’s cryptocurrency market.
Ben Davis, digital assets team leader at Superscript — a UK startup and insurance broker licensed by Lloyd’s of London — told Cointelegraph that crypto has been marginalized in insurance solutions.
“Superscript has focused on insurance for emerging technology areas for years. I lead a team that is specifically focused on crypto, and never in my career have I seen an industry become more marginalized,” he said. While the cryptocurrency sector is making strides, Davis believes it continues to lack insurance solutions due to the industry’s heavy financial focus. He said:
“Crypto tackles something very fundamental, which is money. But as a society, we tend to shy away from this topic. When a tech sector focuses on difficult issues related to value and currency exchange, insurance companies tend to walk away from that conversation.”
Growing need for crypto insurance
While that may be the case, the need for insurance solutions within the crypto industry is becoming more important than ever. To bridge this gap, Davis explained that Superscript takes a centralized approach to bridge the gap between traditional insurance providers and crypto companies. “We transfer the risks associated with digital assets to the broader insurance community. Everyone on our team holds and interacts with crypto, so we speak the language,” he commented.
As a Lloyd’s broker, Davis said the company has experience placing clients in front of multiple insurance companies. As such, the company takes a centralized finance (CeFi) approach by introducing crypto companies to insurance providers suited to their needs. “We work with many non-fungible token organizations or crypto companies that work with big names in entertainment to deal with traditional insurance companies. We provide insurance for the full spectrum of digital asset businesses, including tokenization platforms, miners, custodians, blockchain developers and more,” he shared.
Regarding the process involved, Davis explained that Superscript helps educate insurers on risk concerns related to cryptocurrency to ensure they can work with digital asset companies. Like most traditional insurance providers, Davis pointed out that insurers working with crypto will take premiums in fiat currency, not crypto. “We are currently looking at ways to innovate by making this process more seamless for our customers,” added Davis.
While Superscript aims to bridge the gap between traditional insurers and crypto companies, a range of decentralized finance (DeFi) insurance solutions has also materialized. Dan Thomson, chief marketing officer of InsurAce.io — a protocol designed to protect against decentralized financial risk — told Cointelegraph that while crypto insurance is broad, it basically means that crypto users are protected against specific risks and catastrophic losses in their portfolios are. “It’s a financial insurance vehicle that’s emerging in a multi-trillion-dollar market,” he said.
With this in mind, Thomson explained that InsurAce aims to solve the inherent risks associated with DeFi protocols. To that end, Thomson mentioned that InsurAce works by allocating committed capital as insurance capacity in its protocol. DeFi users can then buy this capacity to cover their investments and deployed assets across different protocols. “In the event of an exploit, customers can complain via the InsurAce app, for example. The decentralized organization, or DAO, will then vote on the legitimacy of those claims,” Thomson said.
Although this process differs from traditional insurance solutions, it has proven to be effective. According to Thomson, InsurAce’s biggest payout came when the Terra ecosystem collapsed in May 2022.
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“We received a total of 180 applications. InsurAce paid out $11.7 million to 155 affected TerraUSD Classic (USTC) victims,” he said. About 8% of InsurAce’s USTC payout was in stablecoins, while 60% was made up of Layer 1 tokens and the remaining 4% was paid in the platform’s INSUR token. According to Thomson, this process took a month, which is typically faster than traditional insurance companies process payouts.
Given the decentralized nature of the crypto sector, it should come as no surprise that other projects are focusing on DeFi insurance. Adam Hofmann, founder and CEO of decentralized insurance protocol Nimble, told Cointelegraph that for the crypto sector to thrive, digital assets need to be backed by insurance. After 22 years in the traditional insurance industry, Hofmann founded his company in June 2021 with the aim of creating a more democratized insurance process.
Hofmann explained that Nimble applies traditional insurance concepts to decentralized finance. For example, the platform is built on the Algorand blockchain and is working to insure DeFi projects powered by Algorand. But like traditional insurance providers, Hoffman explained, Nimble is made up of insurers, loss assessors, and loss adjusters, all pulled together to enable “risk pools.”
“A risk pool is like a liquidity pool, but it includes retail and institutional investors who allocate money to subsidize the insurance risks. This creates a more democratized insurance process,” he noted.
Hofmann added that Nimble works directly with clients to gather key information required for underwriting. This data is then published on the Nimble portal, allowing users to purchase insurance for specific DeFi platforms.
“When users stake an amount of crypto on a platform we support, they can take out the insurance for a fee. This premium goes into the risk pool for this project and customers will receive a non-fungible token in their crypto wallet representing this insurance policy,” he explained. In the case of a DeFi hack, Hofmann mentioned that once the community and smart contracts are approved, customers will be notified immediately and receive crypto payouts directly to their wallets.
In fact, democratization seems to be a common theme among crypto insurance providers. For example, Nexus Mutual is a discretionary mutual currently backing millions of dollars in Ether (ETH) for various DeFi projects.
Hugh Karp, the company’s founder, told Cointelegraph that the platform is an automated version of a very old structure, with members sharing risk. “The main problem that Nexus solves is sharing new and novel risks in the cryptocurrency space where there is no cover in regular markets.” According to Karp, Nexus does this by allowing members to decide how to price risks and how damages are to be paid.
While this approach may work well 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. Pricing risk appropriately is also a challenge, and we’ve seen some other crypto insurance platforms struggle with this recently with the collapse of Terra.”
Education is crucial for launching DeFi and CeFi insurance
While some members of the cryptocurrency ecosystem see centralized approaches to insuring digital assets as harmful, it is evident that both CeFi and DeFi solutions are needed. “Traditional CeFi insurers often get a bad rap, but this year alone I’ve seen more traditional insurers enter the crypto space than in the last five years of my career,” Davis said.
This has become the case, especially as more and more institutional investors enter the digital asset sector. “Many of the businesses that we insure require financial support from traditional insurance providers that are regulated,” Davis noted. This notion is also starting to catch on with DeFi providers. For example, Hofmann mentioned that Nimble is in the process of receiving an insurance license from the Bermuda Monetary Authority to provide both DeFi and traditional insurance capital protection. In the meantime, Hofmann thinks it’s important that the Algorand Foundation supports Nimble by providing certification of the platform for users.
Even with certifications and credibility, insuring crypto assets remains a tricky business. For example, a number of cryptocurrency exchanges have recently come under fire for making false insurance claims.
Last month, 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.
Additionally, Celsius — the recently bankrupt cryptocurrency lending platform — is facing a lawsuit based on bogus claims that users’ digital assets were insured. “The challenge of the insurance industry is that it can be confusing. People and organizations sometimes don’t know what they’re actually insured for,” Davis said. Because of this, Davis believes that trust can easily be undermined within an organization or an entire industry.
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To ensure smooth advancement, industry experts agree that more education is needed. For Davis, this starts with training traditional insurance brokers on how to handle crypto claims. DeFi-focused solutions, on the other hand, need to focus on helping investors understand what is covered from the start.
“For example, market volatility can create confusion. InsurAce also doesn’t offer KYC customers, but a log on their website lists that their assets are insured through us. When the Terra incident happened, customers were unaware of their coverage,” Thomson said. Given this complexity, Thomson believes that the vast majority of insurance coverage is provided by crypto-native solutions.
“The risks are very novel and require deep expertise, which our members have. Some traditional vendors have started to dip their toe in the space, but I suspect they will have a few false starts and progress will take time.”