Insurance companies are ready to dip their toes into the unregulated sea of cryptocurrencies, offering protection from theft and large-scale heists.
A Market Ripe for Entry
As of this moment, you can count the number of cryptocurrency insurers – such as XL Catlin, Chubb, and Mitsui Sumitomo Insurance – on one hand. That’s about to change, however, as various other insurance companies have expressed interest in safeguarding digital currencies.
With Bitcoin and other cryptocurrencies recently exploding into the mainstream consciousness following an impressive run-up in the closing months of 2017, insurance companies are clamoring to lead the charge in insuring a largely uninsured market – and are willing to bet big on the unregulated market’s future growth.
This news comes in hot off the hack of Tokyo-based exchange Coincheck’s recent loss of around $534 million worth of cryptocurrency to hackers – which is hardly the first time criminals have made off with digital currencies.
In addition to digital theft, cryptocurrency investors are also subject to technical errors, fraudulent exchanges, and other dangers – and very little protection exists for those who find their holdings have unexpectedly disappeared.
Up to the Challenge
Insuring the unregulated sea that is cryptocurrency is no easy feat, and provides a whole slew of new challenges to companies largely unfamiliar with the emerging technology.
According to Christopher Liu, head of the American International Group Inc’s North American cyber insurance practice for financial institutions, insuring cryptocurrency is still in the “exploratory phase” – and adapting an existing model is key. “It’s sort of akin to a digital armored car service,“ he told Reuters. ”If there is a problem – like an accident or a robbery – that’s going to be the accumulation of all these exposures.”
A seemingly endless supply of shady and fraudulent cryptocurrencies also provide problems for insurance companies looking to gain a foothold in the market, as do legitimate exchanges and wallets unintentionally underprepared for the sheer weight of the market.
Many insurance companies are therefore taking a piecemeal approach.
The Great American Insurance Group, for example, only protects Bitcoin-accepting businesses from employee theft, but doesn’t insure against hackers. Other companies will avoid insuring online wallets—commonly known as “hot wallets”—due to the increased risk of outside hackers.
Volatility in the cryptocurrency market provides even more concerns, as the price of Bitcoin and other alternative cryptocurrencies have already seen dramatic increases in very short periods of time—meaning an expensive policy signed one year ago would cover significantly less Bitcoin that it would have in December 2017.
Of course, with any revolutionary new industry comes new challenges, and only those insurance companies bold enough to offer innovative solutions will profit the most. “This whole space is maturing and growing,” Henry Sanderson of Safeonline LLP told Reuters. “If we don’t embrace it now, it’s a missed opportunity for insurers.”