The crypto market is maturing pretty fast, resulting in higher demand for crypto-related insurance. In one of the reports by Investopedia, crypto insurance is a huge opportunity. Allianz, the spokesperson from one of the largest insurers, indicated that the cryptos have become “more relevant, important, and prevalent” in the modern economy.
Challenges for Crypto Insurance Industry, Possible Solutions
However, the whole crypto ecosystem is still considered highly volatile and dangerous, where funds are not considered secure even when working with top exchanges. Some platforms, such as Coinbase, indicate that their hot wallets are insured, but they have never revealed whether the assets therein are insured.
Insurers are faced with a number of challenges, including the following:
- Premiums are defined using historical data, which is pretty slim and missing in newer crypto and blockchain areas, such as non-fungible tokens (NFTs).
- Crypto space is considered insecure and untrustworthy.
- Users are not comfortable with the responsibility of handling crypto coins alone. This is why the market has been creating custody-type solutions, where trusted firms serve as crypto banks.
Insurers can provide clear guidelines needed by custodians to follow to qualify for insurance. This could help increase familiarity among investors in the industry because many are unaware of the Federal Deposit Insurance Corporation’s coverage set for up to USD 100,000 in the US and the Financial Services Compensation Scheme of up to GBP 85,000 in the UK.
According to Lee, these schemes help make investors more comfortable putting their money in banks. Insurers in centralized platforms should provide similar familiar and traditional coverage against cyber-attacks or hacks.
Confidence to Use Cryptos in the Growing Blockchain Industry
Overcoming the challenges could provide investors with confidence to invest in cryptos and get exposure. Cryptos, as Vogel emphasizes, present an entirely different risk paradigm compared to what investors are used to. “No consumers ever worry about their shares in Tesla going missing from online brokerage accounts,” added Vogel.
According to Michael Vogel, the CEO of Coinstream, fraud is a very big challenge for insurers in the crypto space. Indeed, obfuscation on the blockchain could result in specific types of fraud. Vogel explained that a crypto-insurance fraudster could double-dip, hide or obfuscate their crypto coins as well as insurance payout.
Recently, robust know your customer (KYC) checks have become paramount to crypto providers working with blockchain forensic companies, such as Elliptic, to track transactions between different addresses. Now, risks in the industry should be reduced further to make it simpler for insurers to underwrite. Ultimately, it will play a huge role in giving confidence to both clients and businesses in the space.
This type of confidence is expected to first come from centralized players in the insurance industry as the decentralized solutions develop further before getting into the mainstream.
Over the last few months, decentralized insurance has become pretty active, with top providers, such as Nexus Mutual, covering over USD 400 million in Ether on different projects. According to Lior Lamesh, the CEO of GK8, the crypto ecosystem requires insurance for end-users and decentralized protocols. The industry is growing fast, and it is time for experts to get more involved.
The challenges facing the crypto insurers can be a source of revenue for the industry because the centralized providers could jump in with products that focus on specific types of risks, such as hacks. This centralized form of insurance might be enough to persuade more people to get into the crypto market.