Insurance is key to protecting valuable assets financially. However, the cryptocurrency sector – which is predicted to reach a global market size of $4.94 billion by 2030 – may be left behind when it comes to insuring digital assets.
For example, it is observed that less than 1% of crypto investments are currently guaranteed. Considering the rapid growth and high risk associated with today’s cryptocurrency market, this statistic is shocking.
Ben Davies, Group Leader for Digital Assets at Superscript – a British start-up and London-licensed insurance broker Lloyd’s – told Cointelegraph that crypto is marginalized when it comes to insurance solutions.
“Superscript has spent years focusing on insurance for emerging technology fields. I lead a team that focuses specifically on crypto, and I’ve never seen an industry more isolated in my career,” he said. While the crypto sector is growing, Davis believes insurance solutions continue to be lacking due to the industry’s high financial focus.
“Crypto is dealing with something very fundamental, which is money. But, as a society, we tend to shy away from this topic. While the tech sector focuses on serious questions related to value and currency exchange, insurance underwriters stay away from this discussion.”
Growing demand for crypto insurance
Although this may be the case, the need for insurance solutions in the crypto industry is becoming more important than ever. To fill this gap, Superscript is taking a centralized approach to bridging the gap between traditional insurance providers and crypto companies, Davis said. “We translate risks related to digital assets to the broader insurance community. Everyone on our team deals with crypto, so we speak the language,” he commented.
As a Lloyd’s broker, Davis explained that the firm has experience getting clients in front of many insurance companies. As such, the organization has a centralized financing (CeFi) approach, providing crypto companies with insurance providers that suit their needs. To secure contracts with traditional insurance companies, we work with several imperishable token organizations or crypto companies with big names in entertainment. We insure the entire digital asset businesses, including tokenization platforms, miners, custodians, blockchain developers and more,” he shared.
Regarding the process involved, Davis explained that SuperScript will help educate insurers on the risks associated with cryptocurrencies to ensure they can work with digital asset companies. Like most traditional insurance providers, Davis pointed out that insurers that work with crypto take premiums in fiat currency, not in crypto. “We’re looking at ways to innovate by making this process more seamless for our customers,” Davis added.
While Superscript aims to bridge the gap between traditional insurers and crypto companies, several decentralized finance (DeFi) insurance solutions have also been implemented. Dan Thomson, Chief Marketing Officer of InsurAce.io – a decentralized financial risk protection protocol – told Cointelegraph that although crypto insurance is broad, basically crypto users are protected from certain risks and catastrophic losses to their portfolios. “It’s an emerging financial insurance tool in a multi-trillion dollar market,” he said.
From this point of view, Thomson explained that InsureS aims to address internal risks related to DeFi protocols. In order to do this, Thomson InsurS mentions that in the protocol it works by allocating accumulated capital as insurance capacity. DeFi users can purchase this capacity to cover their investments and assets embedded in various protocols. “In the event of exploitation, for example, customers can claim through the InsurAce app. The decentralized organization, or DAO, then votes on the legitimacy of these claims,” said Thomson.
Although this process differs from traditional insurance solutions, its effectiveness has been proven. According to Thomson, the largest insurance payout occurs when the Terra ecosystem collapses in May 2022.
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“We received a total of 180 claims. InsurAce has paid $11.7 million to 155 victims injured in the TerraUSD Classic (USTC),” he said. 8% of insurance USTC payouts are paid in Stablecoins, 60% consist of Layer-1 tokens, and the remaining 4% are paid in platform INSUR tokens. According to Thomson, this process took about a month to complete, which is faster than payments typically made by traditional insurance companies.
Given the decentralized nature of the crypto sector, it should come as no surprise that other projects are focusing on DeFi Insurance. Adam Hoffman, founder and CEO of decentralized insurance protocol Nimble, told Cointelegraph that digital assets must be backed by insurance to advance the crypto sector. After 22 years in the traditional insurance industry, Hoffman founded the firm in June 2021 with the goal of creating a more democratized insurance process.
Hoffman explained that Nimble applies traditional insurance concepts to decentralized finance. For example, the platform is built on the Algorand blockchain and works to verify Algorand-powered DeFi projects. But like traditional insurance providers, Hoffman explained, Nimble is comprised of underwriters, claims adjusters and loss adjusters who come together to help facilitate “risk funds.”
“A risk pool is like a liquidity pool, but it involves retail and institutional investors setting aside money to subsidize the risk on insurance. This will create a democratic insurance process,” he said.
Hoffman added that Nimble works with customers to collect information necessary to write directly. This data is then streamed to the Nimble portal, which allows users to purchase insurance for specific DeFi platforms.
“If users hold an amount of crypto on the platform we support, they can purchase the insurance at a reasonable price. This premium goes into the risk pool for that project and customers receive an invulnerable token in their crypto wallet representing that insurance policy. In the event of a DeFi hack, Hoffman says customers will be notified immediately and payments will be made via He mentions that they receive crypto directly into their wallets when the community and smart contract are approved.
Indeed, democratization seems to be a common theme among crypto insurance providers. For example, Nexus Mutual is currently a mutual fund of interest investing millions of dollars in Ether (ETH) for various DeFi projects.
Company founder Hugh Karp told Cointelegraph that the platform is an automated version of an older structure where members share concerns together. “The main problem that Nexus solves is the sharing of new and innovative risks in the cryptocurrency space, where coverage is not available in regular markets.” According to Karp, Nexus does this by allowing members to decide how claims are paid and how risks are priced.
While this approach may be ideal for the crypto industry, Karp notes that building trust with customers to ensure genuine claims are paid remains a challenge. “Achieving this can only be achieved with time and a track record. It’s also a challenge to sell risk appropriately, and we’ve seen some other crypto insurance platforms struggle with this recently with the collapse of Terra.”
Education is critical to starting a DeFi and CeFi insurance business.
While some members of the cryptocurrency ecosystem see centralized approaches to securing digital assets as harmful, it is clear that both CeFi and DeFi solutions are needed. “Traditional CeFi insurers often get a bad rep, but this year alone I’ve seen more traditional insurers enter the crypto space than I’ve seen in the last five years of my career,” Davis said.
This has become an issue, especially as more institutional investors enter the digital asset sector. “Most of the companies we insure need to be funded by traditional insurance providers,” Davis said. This mindset is starting to catch on with DeFi providers. For example, Hoffman mentioned that Nimble is in the process of obtaining an insurance license from the Bermuda Monetary Authority to ensure definition and traditional insurance capital protection. In the meantime, Hoffman believes it’s important for the Algorand Foundation to support Nimble by providing users with the platform’s certification.
Even with certificates and credibility, securing crypto assets remains a tricky business. For example, several cryptocurrency exchanges have recently come under fire for falsely claiming to be insured.
Last month, the leading cryptocurrency exchange FTX received a letter from the Federal Deposit Insurance Corporation (FDIC) falsely suggesting that user funds are FDIC-insured.
Moreover, Celsius – the recently bankrupt cryptocurrency lending platform – is being sued over false claims that users’ digital assets were insured. “The challenge for the insurance industry is that it’s confusing. People, with companies, sometimes don’t know what they’re covered for,” Davis said. Because of this, Davis believes that trust in an organization or in the industry as a whole can be easily lost.
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Industry experts agree that to ensure smooth development moves forward, more education is needed. For Davis, that starts with teaching traditional insurance brokers how to handle crypto claims. On the other hand, solutions that focus on Defi should focus on helping investors understand what is covered from the beginning.
“For example, market volatility creates confusion. InsurAce also does not KYC clients, but the protocol is that their assets are listed as insured on our website. When the Terra incident occurred, clients were not clear about their coverage,” said Thomson. He believes that native solutions will be provided.
“The risks are very new and require deep specialist knowledge that our members have. Some traditional service providers are already dipping their toes into the space, but I suspect there will be a few false starts and progress will take some time.”