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Insurers face many challenges protecting the crypto industry, mainly due to the space being highly unregulated. However, InsurTech and legacy players are digging deep into their innovative pockets to contribute fresh crypto solutions, supporting its ongoing evolution. One notable coverage is digital asset insurance, a safety net no crypto company should go without, given the market’s “wild west” nature. Let’s review this coverage and why the crypto industry needs it.
Why Crypto Insurance Is Challenging
Until recently, the U.S. government’s approach to crypto has been a mixture of aggressiveness and indifference. However, earlier this year, President Biden signed an Executive Order addressing the lack of framework for the U.S. development of cryptocurrency. While this doesn’t solve all our crypto problems, it’s a progressive step.
Meanwhile, commercial insurers face unique challenges protecting the crypto space. For one, crypto doesn’t have much of an actuarial track record, leaving insurers playing the guessing game. And regulatory inconsistencies and lack of infrastructure create anything but firm footing for crypto.
For example, neither SPIC nor the FDIC insures crypto assets. As imagined, this dynamic creates an environment protected very little by the Federal Government.
Headlines only remind us how “wild west” crypto can perform on the open market. The recent Bitcoin and Ethereum price swings are dizzying, but cryptocurrencies are some of the most volatile assets on the market. These ups and downs make it tricky for insurers to tag a price on cryptocurrencies and identify accurate insurance pricing.
Understanding Digital Asset Insurance
Sometimes called digital wallet coverage, digital asset insurance is relatively self-descriptive. In a nutshell, this policy protects digital assets against crimes and theft via electronic activity. Briefly, digital assets are anything uniquely identifiable and stored digitally, such as cryptocurrencies or NFTs.
But let’s back up. Historically, crime insurance covers the asset’s value, while cyber liability insurance responds to first-party damages and third-party lawsuits related to electronic activity. Digital asset insurance combines these two coverages in a hybrid design, addressing both crime and cyber liability risks in one policy.
Naturally, this coupling makes sense for crypto as most commercial insurance underwriters face challenges predicting the likelihood of a cybercriminal stealing crypto assets. And it’s tricky knowing how much damage it would cause an investor if a hacker stole their private wallet.
How Crypto Benefits from Digital Asset Insurance
While many individuals struggle with the wild west aspect of crypto, digital asset insurance helps tame its unpredictability. Of course, it’s unlikely to predict when or how a cybercriminal will hack a digital wallet, but the pain of such an occurrence will be far less with a safety net. In a sense, digital asset insurance helps bolster society’s acceptance of crypto, making it safer and more attractive.
It’s safe to say that digital asset insurance defines price margins for cryptocurrencies better than any other policy to date. Combining the two coverages to form a hybrid helps insurers produce the capital needed to cover claims, even high-dollar cases. While this innovative approach is undoubtedly advantageous for insurers, it’s also beneficial for the crypto industry, keeping coverage affordable and effective.
Digital asset insurance addresses the most significant risks the crypto industry faces while also considering its human aspect. As mentioned, digital asset insurance is tailored to crypto, combining crime and cyber liability coverage. And because blockchain technology often involves collecting and storing personal identifiable information (PII), data protection is of utmost importance.
The cyber liability aspect protects crypto investors, encouraging more activity in the space, while the crime part responds to our everyday financial worries. It’s the one-two punch driving crypto into success, with safety and security at the helm.
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