Crypto insurance allows exchanges and investors to recover some of their losses in the event of theft or protocol failure. Decentralized cryptocurrency insurance often covers smart contract vulnerabilities, devaluation, and custody risk.
What is Cryptocurrency Insurance?
Decentralized crypto insurance usually offers coverage for a certain time frame and a certain amount, but there may be a capacity limit that determines how much coverage can be purchased. Surveillance agencies may offer crime insurance that protects some of users’ funds against losses from theft and cybersecurity breaches. For investors, there are decentralized insurance platforms such as Nexus Mutual that cover failures of an individual protocol, protect interest-bearing tokens against de-pegging events, and even protect against hacks and stalled withdrawals on exchanges and custodian wallets.
You are likely to have active insurance plans, especially health and auto insurance. Insurance companies are extensive under insurable entities, and their list is likely to continue to grow.
The probability of developing an insurance policy for an asset depends on its nature. Insurance policies are designed to provide recovery avenues should the insured be involved in unfortunate events. While there is a need for coverage in the crypto space, it has become difficult to establish insurance policies in the crypto industry largely due to the lack of regulation and also the relatively new nature of crypto assets.
How Does Crypto Insurance Work?
Unlike stocks, bonds, and cash deposits, cryptoassets are in a gray area and are therefore not included in federal insurance policies. For example, the USD balances of Binance and Coinbase are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 and held in custody accounts, while insurance of crypto balances is left to their discretion.
For individual users, they can purchase insurance plans from decentralized insurance platforms. In the case of Nexus Mutual, the plans can be for a specific coverage with a specific coverage amount over a specific coverage period, or as with inSure DeFi, it can be a lump sum plan that covers a certain amount for multiple coverages. For protocol, exchange, or token-specific plans, there is also a set of capacities that determines how much collateral can be received for each protocol.
Users can purchase these plans with native tokens of a certain number of protocols; For example, the lowest plan available on inSure DeFi requires 2,500 SURE tokens, while insuring 1 ETH on Aave via Nexus Mutual requires 0.0692 NXM.
Can Cryptocurrency Exchanges Be Insured?
Compared to banks and other mainstream institutions, insuring a crypto exchange is not easy. This is primarily due to the nature of the entities under their custody and the technology that powers their systems. Regardless, centralized cryptocurrency exchanges can be very well insured.
London-based insurer Lloyd’s announced in a February 2020 press release that it has partnered with crypto insurance company Coincover to provide insurance services for crypto assets held in hot wallets. According to the statement, the insurance plan is available for wallet balances as low as one thousand euros. A Lloyd’s licensed insurance broker has also launched Daylight, a crypto insurance product that insures crypto businesses against ransomware attacks, unintentional copyright infringement and business interruption.
Binance’s SAFU plan is also a mirrorable deposit insurance system. While its efficiency has not been thoroughly tested, reserving a portion of company revenues for client deposit protection could serve as an impromptu insurance scheme for centralized exchanges and any other custodian. Other existing options can be explored in this sense as well, and as the crypto space evolves, more insurance solutions will emerge while the existing ones get better.
