The increasingly acute need for crypto-native insurance

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The insurance industry has a long history of providing vital support for leaps and bounds in innovation. It is no coincidence that the modern insurance industry and the Industrial Revolution arose in parallel. Indeed, it has been convincingly argued that the invention of fire and property insurance – in response to the Great Fire of London – greased the gears of capital investment that underpinned the Industrial Revolution and likely caused its beginning in London. Through that first technological revolution and every subsequent technology revolution, insurance provided innovators and investors a safety net and acted as an objective outside risk investigator—and thus served as a source of both the encouragement and security needed to test and break down barriers with confidence.

Today, we are in the midst of a new digital financial revolution, and the case for this new technology is clear and compelling. This latest executive order from the White House on “Ensuring the Responsible Development of Digital Assets” underscored this further and was a watershed moment for the industry, raising the debate about the importance of technology nationally and recognition of its importance to US strategic interests and global competitiveness.

No insurance on cryptocurrency
However, given the current insurance capacity of cryptocurrencies estimated at about $6 billion – a decline in a pool of assets with a market capitalization of around $2 trillion – it is clear that the insurance industry is failing to keep pace with its vital role.

This staggering lack of insurance protection for digital assets was specifically pointed out at the December House Financial Services Committee hearings on the state of the market. If this condition persists, it will run the risk of stunting future growth and adoption.

Why have traditional insurance companies avoided entering this field despite the obvious need and opportunity?

Related: Purposeful Shift From Bitcoin Extremes to Bitcoin Realism

Traditional insurers face several major obstacles in responding to the new class of risk presented by cryptocurrencies. The simplest of all is not understanding this often unexpected technology. Even when the technical understanding is there, challenges remain such as the correct classification of new and subtle types of risk – for example, those associated with hot, cold and warm portfolios and how a myriad of technology, business and operational factors affect each. The problem is further exacerbated by rapid industry change, perhaps the best example being the emergence overnight of new and sometimes confusing risk classes, such as Non-Foldable Tokens (NFT).

Of course, many insurance companies are still licking their wounds from their rush to write cyber security policies in the early dotcom days without fully understanding those huge risks and losses that repeatedly resulted.

Meanwhile, according to Chainalysis, around $3.2 billion worth of cryptocurrency was stolen in 2021. With no risk mitigation options in place, this number is enough to give any responsible financial institution considering genuine involvement in this space a heartburn. In contrast, US banks generally lose less than $15 million in compulsory robberies each year. One of the reasons bank robberies are so rare and unproductive (with a success rate of only about 20% with the offender netting an average of about $4,000 per incident) is that in order to operate, most US banks must qualify for comprehensive bond insurance. , which requires security measures designed to limit these losses. In this way, insurance not only manages the risk of losses from theft, but creates an environment in which those losses are less likely to occur.

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