Since its inception, the insurance industry has been a vital support system for innovation. It is not a coincidence that the modern industrial revolution and the insurance industry arose simultaneously. It has been shown that property and fire insurance, which was invented in response to the Great Fire of London, lubricated capital investment and was likely the reason that it began in London. Insurance has been a safety net for investors and innovators through every technological revolution. It also served as an objective, outside validator of risk, thereby providing both the encouragement as well as the security required to test and break down barriers.
We are currently in the midst a digital financial revolution. The case for using this technology is compelling. The White House’s recent executive order “Ensuring Responsible Develop of Digital Assets” was another example of this. It was a turning point for the sector, raising the conversation about the technology to the national level and acknowledging its importance to US strategy, interests, and global competitiveness.
The absence of crypto insurance
However, crypto insurance’s current capacity is only $6 billion. This is a small amount for an asset class that has a market capitalization of approximately $2 trillion. It is clear that the insurance industry is not keeping up with the times and is losing its crucial role.
The absence of insurance protection for digital assets was a key point in the December hearings of the House Financial Services Committee on the market. This state of affairs could lead to future growth and adoption if it continues.
Despite the obvious need and opportunity, traditional insurers have resisted entering this market.
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Traditional insurers are faced with several obstacles when responding to crypto’s new risk class. One of the most fundamental is a lack in understanding this sometimes confusing technology. Even if technical knowledge is available, there are still challenges in properly classifying new and nuanced risks, such as those associated with hot, cool and warm wallets, and the myriad of technology, business, and operational factors that impact each one. Rapid industry change is compounding the problem, perhaps best illustrated by the sudden emergence of nonfungible tokens, or NFT.
Many insurers still feel the pain of the dot-com era’s rush to create cybersecurity policies without fully understanding the risks and the huge losses that often resulted.
Chainalysis estimates that $3.2 billion worth of crypto was stolen between 2021 and 2022. This number, in the absence of any risk mitigation options is enough to make any financial institution seriously consider real participation in this space. U.S. banks lose less than $15m annually to fiat robberies. Bank robberies are rare and ineffective. They have a success rate only 20%, while the perpetrator is paid on average $4,000 per incident. This is because most U.S. banks need to be eligible for blanket bond insurance to continue to function. This requires security measures to minimize these losses. Insurance not only reduces the chance of losses from robbery, but also creates a safer environment.
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Crypto insurance is a must
Insurance against loss of crypto assets is the same. Because the underwriting process requires such high levels of expert scrutiny and compliance, goods that are stored in insured wallets not only are protected, but they are also less likely to be stolen.
It is clear that crypto asset insurance is needed and beneficial. It’s obvious that traditional insurance will not be able to address the crypto asset risk issue in a reasonable timeframe. The solution must come from within. We need crypto-native solutions that are tailored to the needs of the industry, as well as the flexibility to cover all aspects of crypto assets, products, and services.
There are many benefits to home-grown risk solutions.
First, dedicated crypto insurance firms have greater industry knowledge and expertise. This allows for better coverage which in turn equates to greater safety and security for the entire crypto industry. With this knowledge, crypto-native insurers would be able create risk mitigation products that can adapt to the changing industry’s needs. These firms would be able to expand their insurance capacity by joining forces with traditional insurance markets once they are in place. A dedicated crypto insurance sector will be able to meet all legal and regulatory requirements. This will ensure that crypto adoption is not hampered by the absence of insurance.
What’s stopping crypto-native insurance solutions stepping up to address the problem in light of all this?
Ironically, crypto asset insurance is choosing to invest in crypto projects that will have a negative impact on the future viability of the industry.
It is obvious that we are at the forefront of a new technological revolution. It is also evident that insurance played an important role in helping previous technological revolutions reach their full potential. It is unacceptable that there is no crypto asset protection today. It is crucial that crypto communities recognize the dangers posed by the status-quo and its lack of crypto asset insurance options.
We believe that we can make it again, and have solved seemingly impossible technological and economic problems.
Sofia Arend and J. Gdanski co-authored this article
This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Sofia Arend is currently the Communications and Content Lead at the Global Blockchain Business Council. Sofia was previously employed by the Atlantic Council, a global think tank that focuses on national security and defense. Sofia graduated from the University of Texas at Austin with a Bachelor of Arts degree in International Relations and Global Studies. She was also a NCAA Division-I-recruited athlete rower. Gdanski, a privacy, security, and risk-management expert and the founder of Evertas, the first company to offer insurance for crypto assets and blockchain systems, is also a leader in the enterprise Blockchain space.
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