What is Crypto Insurance?

From the inception of cryptocurrency in 2009, several cyber security attacks, and rug pulls have been reported, some of which have destabilized investors leading to huge loss of digital assets and in some cases deaths.

Blockchain technology, though offers security, accessibility, and transparency is still in its developing stages, thus, it is fragile and vulnerable to the nefarious activities of online hackers and scammers.

The protection of investors’ digital assets — cryptocurrencies, tokens, and NFTs — in the event of loss or theft through the dastardly acts of these criminal elements and blockchain failure is the primary focus of Crypto Insurance.

This policy provides some form of succour to crypto exchanges and investors who may be vulnerable to system failure, cyber security breaches, hacks, and device theft.

In this article, the need for crypto insurance will be explained, and make a case for its acceptability within the cryptocurrency world.

What Is Crypto Insurance?

Crypto Insurance is a policy designed to protect investors against any loss associated with scams, device theft, shutdown of service providers, and cyber attacks — hacking, malware, phishing, ransomware, trojan software, and brute force attacks.

The crypto space is prone to numerous attacks and as such the policy further provides some form of security and succour to mostly crypto exchanges and some investors desiring to safeguard their digital assets from unforeseen circumstances.

However, the insurance policy generally does not cover losses from price fluctuations, blockchain failure, or direct hardware loss or damage, nor cover the transfer of cryptocurrency to a third party or losses associated with unauthorized access to your non-custodial wallets due to a loss of your private keys, or loss as a result of investing in a Ponzi scheme.

Insuring crypto assets to a large extent secures the interest of crypto projects, investors, traders, and enthusiasts; helping strengthen the fragile world of cryptocurrency and blockchain technology.

Far-reaching innovations can be adopted to help tackle the wanton cryptocurrency wallet hacks and theft experienced over the decade-long existence of cryptocurrency and the adjoining technology.

Overview of Crypto Attacks

The promising nature of cryptocurrency and blockchain technology and its potential to transform the financial status of an individual and that of a nation are among the reasons for its wide acceptability and usage. It has in the process drawn the attention of online criminals, scammers, and hackers.

These criminals labour day and night to break into crypto wallets — custodial and non-custodial — to defraud their victims, and empty their accounts/savings.

Most often hot (online) wallets are more susceptible to these attacks than cold (offline) wallets which is the primary reason most crypto exchanges rely on storing a large chunk of their digital assets in cold wallets.

Right from the launch of the first cryptocurrency; Bitcoin in 2009, the crypto world has been inundated with reports of scams, hacks, theft, blockchain failures, and project rug pull — a malicious strategy in the crypto world where project developers abandon a project and run away with millions of investors funds.

Statistics show that the number of malicious attacks recorded between 2009 - 2022 in the crypto space is higher than those experienced in other financial sectors combined within this period.

According to CNBC, “Crypto scammers took a record $14 billion in 2021,” This is a record 516% increase from 2020 according to the report. Of this total, 72% of stolen funds were taken from DeFi protocols, a burgeoning area in the crypto industry.

In a similar report released by the US Federal Trade Commission (FTC), Nover $1 billion worth of cryptocurrency was lost to scams in a space of just 14 months, from 1st January 2021 to 31st March 2022, and over 46,000 people were affected. The report noted that this is a record higher compared to other payment methods.

Millions of dollars worth of crypto assets have been lost over these years, and investors have had one horrible experience or the other to recount. Numerous scams, hacks, theft, and rug pulls have been reported, dampening the morale of new and existing investors and the wide acceptance of digital currency in the world.

Criminals exploit the anonymity of blockchain technology and look out for bugs in smart contracts and other loopholes.

Remarkable Cryptocurrency Hacks

Coinrail

Coinrail, a South Korean exchange was hacked seven days before Bithumb. The hackers took about $40 million worth of digital currency and tokens.

Bithumb

Bithumb, before the hack of June 19, 2018, was the sixth-largest crypto exchange around the world and the leading exchange in South Korea. The exchange lost about $31 million in cryptocurrencies as a result of the hack and was seen by many as an insider job.

Coincheck

Another leading Asian cryptocurrency exchange, Coincheck suffered what appears to be one of the biggest hacks in the history of blockchain technology. It suffered a terrible hack in January 2018, losing 500 million of its native coins, NEM, valued at $533 million equivalent to 58 billion yen.

KuCoin

On 26 Sept. 2020, KuCoin — a Singaporean-based cryptocurrency exchange reported that they have been hacked. The total amount lost was $285 million, but was able to recover 84% of the stolen fund through her partners and law enforcement agents; while the hackers took away 16%, that is $45.55 million. The crypto exchange covered this loss through her insurance fund.

Cream Finance

About $130 million of Cream Liquidity Pool (LP) tokens and other ERC-20 tokens was stolen from Cream Finance in two separate hacks, shattering the prospects of this exchange. According to Coingecko, the price of cream (CREAM) has plummeted following the news, down from $152 to $111 in minutes — a 27% drop.

The event of October 2021 reveals that hackers or scammers could be young or old, male or female. In this cyber attack, an 18-year-old hacked Indexed Finance and stole a whopping $16 million from the crypto exchange.

Poly Network

One of the biggest cyber security breaches orchestrated by Hackers was the ‘Poly Network Hack’, where more than $600 million was stolen from Ethereum, Binance Smart Chain, and Polygon wallets. However, it was reported that the hacker, referred to as ‘Mr. White Hat’, returned most of the funds after a promise of a $500,000 bounty and a position of ‘chief security adviser’ in the crypto firm.

Crypto.com

Also, a US-based cryptocurrency exchange, Crypto.com reported on 20 January 2022 that more than 400 users’ accounts were hacked and unauthorized withdrawals were carried out from their accounts.

Ronin Network

Subsequently, following in the severity of the Poly Network’s Hack comes the Ronin Hack. The Ronin Network is a key platform powering the popular mobile game Axie Infinity on 23 March 2022, lost $625 million worth of cryptocurrency (173,600 ether and 25.5 million in USDC) to hackers.

Solana

Solana, a layer 1 blockchain, reported that about 8000 users’ wallets were hacked and about $6 million in digital assets stolen. This isn’t good for investors and further stresses the need for stiff security of funds and backup options with crypto insurance.

Every passing week, the crypto world is awash with disturbing reports of cyber security breaches, scams, theft, a bug in smart contracts, and compromises of private or administrative keys leading to fraudulent activities in crypto wallets and huge loss of digital assets.

However, Crypto Insurance assures coverage for unforeseen challenges crypto companies or investors might incur during operations or transactions and helps mitigate the devastation of these losses.

In addition, most of these attacks are focused on hot wallets — an online storage mechanism less secure than a cold or offline storage system. Consequently, by putting in place rigid security, use of cold storage over hot storage for crypto assets, and carrying out regular checks of your wallet and smart contracts, the nefarious activities of online criminals would be reduced.

The Importance of Crypto Insurance

Cryptocurrency as a digital currency is highly valuable hence the need to safeguard both those keeping these assets — Centralized Exchanges (CExs) and Decentralized Exchanges (DExs) — and those that have invested their hard-earned resources or carry out some form of trading activities — whale and retail investors.

One of the many ways to protect this industry is through Crypto Insurance. But why should a crypto exchange or investor opt for insurance?

Crypto Insurance helps protect a portion of the digital assets held by various custodial wallets or exchanges against cyber security attacks.

Insuring crypto assets with private industries or in exchanges helps mitigate losses and saves the individual or project from possible collapse.

Also, Crypto Insurance provides a soft landing for crypto projects and investors who may be victims of hacks and other vicious attacks.

Moreover, crypto insurance in the crypto world helps instill trust within weary investors and assures the legitimacy that the industry truly needs. Thus, attracting potential investors.

Furthermore, knowing that your digital assets are well insured greatly boosts customer confidence and attracts huge returns to the industry as seen with traditional financial institutions.

In addition, adopting crypto insurance would reduce the myriads of heartbreaks and avoidable deaths experienced over the years as a result of huge cryptocurrency losses.

Insurance Companies and Crypto Adoption

With the increasing adoption of cryptocurrency and other blockchain-based digital assets by both private and institutional investors the number of traditional insurance companies willing to pay claims with the currency to their clients as insurance coverage or receive cryptocurrency has increased.

Others are directly getting into the crypto market as insurance providers with an interest in protecting individuals and institutions against hacks, theft, and smart contract failures among others.

A publication by AM Best — the world’s first credit rating agency — titled, “cryptocurrency: Insurance Industry tests the waters with new initiatives,” carefully studied the list of insurance companies getting involved in cryptocurrency and the underlying technology.

For instance, Aon — the professional service organization on risk, retirement, and health — recently partnered with Nayms to build extra capacity and product offerings in the insurance market for digital asset risks to create a platform to price and underwrite crypto risks in the digital currencies being insured.

Furthermore, Metromile Inc. — the pay-per-mile auto insurer — plans to allow its customers to pay premiums and receive claims payouts in cryptocurrency and recently acquired $10 million in Bitcoin for its general accounts.

NYIDG — A New York-based provider of technology and investment solutions for Bitcoin — raised $100 million in additional growth capital from partners including Starr insurance, Liberty mutual insurance, Massachusetts Mutual, and others.

Evertas — formerly BlockRe — has raised almost $5.8 million in seed funding and seeks to offer insurance cover for institutional holders of crypto assets and intends to cover losses due to theft of the private keys to wallets.

Moreover, Universal Fire and Casualty Insurance Company — a multiline property/casualty insurer based in Michigan — accepts several different cryptocurrencies (BTC, ETH, BCH, LTC, etc) for premium payments for direct online license and permit bonds and other surety bond products.

Many insurance companies are still studying the crypto market and do not see cryptocurrency as a reliable asset class.

Notable Crypto Insurance Companies

Many well-known traditional insurance companies are skeptical when it comes to delving into the stormy waters of cryptocurrency. This is a result of the near absence of regulatory frameworks, and the highly volatile nature of the digital currency, mired with so many speculations and uncertainties.

Regardless of these daunting challenges rocking the sector, the following cryptocurrency insurance companies and crypto exchanges offering insurance stand out and are listed in no particular order.

Kase

Kase is one of the leading Canadian-based crypto insurance companies that offer, “complete protection against hacks and scams that result in the loss of digital currencies,” according to their website.

Their services are exclusive to the citizens and residents of Canada.

CoinCover

CoinCover is an insurance-backed cryptocurrency protection platform that provides security and recovery solutions for crypto investments, technologies, and companies. The company ensures some selected crypto wallets — BitGo, Vesto, Civic. The insurance covers loss or stolen funds either through device theft, cyber-attacks, and hacking by using the wallets. The payable amount is dependent on the protection the wallet offers.

In addition, CoinCover, takes responsibility for your crypto assets in the case of technology/system failure, thus providing some succour to crypto exchanges and investors.

EmBrokers

EmBrokers also offer cryptocurrency and blockchain insurance specializing in difficult-to-insure industries — crypto/blockchain projects — by providing comprehensive coverage through using their knowledge of the crypto-backed business.

Nexus Mutual

Nexus Mutual is an Ethereum-based Decentralized Autonomous Organization (DAO), entirely owned and run by members, that provides insurance cover against Smart Contract failure and Exchange hacks. In other words, the platform “secures risks and potential bugs in smart contract code.” The NXM token maintains membership, furnishes rewards, and holds governance voting rights on the Nexus Mutual network.

Also, aside from ensuring digital assets, mitigation strategies ought to be adopted such as the use of multi-signature wallets, offline cold storage, server-side security, encrypting both custodial and non-custodial wallets, and storing your private keys inside an encrypted folder.

Centralized Crypto Exchanges

Some CEXs offer some form of protection to your crypto assets in their custody. Notable among them include; Coinbase, Binance, BlockFi, and Bitstamp among others.

Conclusion

Crypto insurance is still a new frontier but promises to safeguard crypto exchanges and investors against crypto losses due to cyber security breaches and system failure.

So many traditional insurance companies are indicating a growing interest in the gradual adoption of blockchain technology to process operations and handle claims and encourage payment and acceptance of cryptocurrencies.

However, the challenge of volatility, uncertainty, and little or no regulation of the crypto industry are of great concern to these companies but the increasing adoption of digital currency and the underlying technology by millions calls for a form of insurance cover.