Bitcoin and Ethereum were not the only ones from the crypto industry to reach the ATH in 2021. Another thing from the same industry also reached its ATH last year- crypto scams. If you need numbers, well, a jaw-dropping amount of $14 billion was lost due to crypto scams in 2021. The number was almost double the amount ($7.8 billion) that was lost in 2020 due to crypto frauds. Such panicky numbers have made several aspiring investors apprehensive of the crypto industry; they are having second thoughts about whether or not to make any investment in cryptocurrency. But, then, you also have crypto insurance.
A relatively new concept in the crypto scene, crypto insurance is certainly a welcome move. Put simply, crypto insurance will make investors confident about the crypto industry and motivate them to invest in crypto with less worry. Interestingly, the concept of crypto insurance was pioneered by a UK-based esteemed insurance company- the same company that introduced the concept of insurance in general in the first place.
The article below offers a brief on the top facts about crypto insurance.
Crypto insurance- overview
The crypto insurance doesn’t have backing from the national government. The American FDIC does not offer any kind of protection to the crypto industry. In fact, this is one of the major reasons behind the surging rate of scam in the current crypto scene- and doubts about whether to invest in crypto. It’s true that two national governments have already conferred legal tender on Bitcoin- but the rest of the world are far from officially accepting Bitcoin or crypto in general into the mainstream finance industry.
Bottom line is- the crypto industry is largely operating without any kind of solid backing or protection. Crypto insurance aims to offer the needed protection (to some extent) to the industry and the industry participants.
Crypto insurance offers protection for funds lost in crypto scam or theft. For example, if you lose your funds stored in an exchange wallet due to a hacking attack on the exchange- crypto insurance will help you to receive compensation for lost funds. However, according to some experts, you might not receive 100% of the funds lost due to exchange hacks.
But crypto insurance will usually not offer coverage if a crypto investor loses money in a fake Ponzi scheme. You also might not get coverage if you have lost crypto funds for personal reasons, like leak of wallet credentials, damage or loss of crypto wallet hardware, and so on.
How does crypto insurance work?
Well, crypto insurance mostly offers protection to businesses related to the crypto industry. In other words, it could be difficult to receive crypto insurance if you are an investor who wants to invest in crypto. The businesses that can apply for crypto insurance are:
- Crypto exchanges
- Payment processing companies
- Mining companies
- Financial service portals
Among these, the most common and frequent customer of crypto insurance is crypto exchange.
A crypto exchange guarded by crypto insurance is likely to offer insurance coverage for protection of crypto assets stored in its own wallet against losses arising from cyber breaches and theft.
It’s to note here that some companies that offer crypto insurance now offer insurance on hot wallets for crypto storage and trading. Hot aka online wallets are usually vulnerable and prone to hacking attacks. Insurance protection for hot wallets will encourage more traders and investors to trade and invest in crypto.
Majorly, you will find two types of insurance policies in the crypto scene-
This crypto insurance coverage offers protection for loss of customer data due to negligence, cyber breach, malware attack or hacking attack on a crypto exchange. Cyber liability insurance is crucial to save the reputation and image of a crypto exchange in incidents of attacks and loss.
This crypto insurance offers protection on theft or loss of crypto assets (of investors) stored in a crypto exchange. These days, some of the crime liability crypto insurance packages also cover theft in hot and cold storage platforms.
What won’t be covered by crypto insurance?
But, the company might not extend insurance protection if an investor loses money due to loss/breach of credentials that eventually made way for unwanted access to his/her personal exchange account.
What lies ahead for crypto insurance?
Well, one of the many reasons why the crypto insurance sector is partly reluctant or limited in its scope is the unregulated nature of the crypto industry. The unregulated aspect of the crypto scene is a chief reason behind the rising crime rates in the crypto scene. In fact, a lot of aspiring investors are in constant dilemma about whether to invest in crypto, especially because of lack of regulation in the crypto sector.
However, national governments around the world are finally gearing up to implement regulation in the crypto scene. The EU has already taken a landmark step by signing the MiCA that has stated the operational framework for businesses operating in the crypto space, such as crypto exchanges.
According to experts, expansion of a regulatory environment would encourage the insurance industry to come up with more offerings for the crypto sector.
Why should crypto businesses sign up for crypto insurance?
If you are in a crypto-related business, say exchange, you must opt for crypto insurance.
Crypto industry is booming but a larger section of aspiring investors are still in two minds about whether or not to invest in crypto. Most of them need some kind of assurance that even if they lose their funds on a hacking attack launched on a crypto exchange, they will get their funds back. This little assurance will go a long way in transforming a highly skeptical investor into a loyal investor who will voluntarily invest in crypto. Not just that, the investor will even bring in more referrals who would be willing to invest in crypto as well.
In fact, crypto investment would do much to elevate the overall reputation and credibility of your crypto exchange, thereby pulling in more investors and their referrals.