Explainer: Crypto’s insurance

Good morning! Welcome to The Daily Moon. It’s a brand new week. And some exciting things are happening. Ready to meet your digital child? In about 50 years, the world will have digital children existing only on the metaverse. AI expert Catriona Campbell says the virtual child will not just look like their parents, but also start back answering soon after. Black Mirror vibes?

Moving on, today we talk about why crypto needs insurance. Also, some bad news from Coinbase. Let’s get started.

Crypto Needs Cover

The TerraUSD crash hasn't been forgotten yet. Close to $60 billion was lost and $500 billion of crypto market cap vanished almost overnight. Exchanges and investors who lost money are angry. There is little hope to recover lost investments. One DeFi firm is paying ~$11 million as compensation. But that’s not really enough.

Unlike traditional finance, a majority of crypto assets are not protected by insurance. But there is change on the horizon. With crypto becoming mainstream, insurers and brokers are now open to making tweaks.

The need for crypto insuranceCrypto is volatile. Just like any other market instrument. That means the crypto exchanges and their investors need insurance covers. Some of the must-haves include:

1. Cyber insurance: Hacks are not uncommon in the market. Remember the hacker who swindled Terra recently of ~$2 million? Or the $600 million Ronin hack in March?

2. Errors & Omissions cover: Even a small error by an exchange employee can wipe off millions of dollars worth crypto.

3. Directors’ liability cover: Senior-level decision makers in a crypto firm could be held liable for defamation and other such lawsuits. Spending too much money on legal expenses could make business unsustainable.

The biggest threat is phishing and cyber crime. Criminals stole ~$14 billion in 2021, which is an all-time high record. And ~$10 billion worth crypto is still stored in illicit wallets. That makes insurance even more important.

Who’s covering what?To be fair, some progress has happened. Niche companies such as InsurAce, Nexus Mutual, and Superscript offer crypto insurance. And with this, the market is opening up:

• Lloyd’s of London licensed broker Superscript launched a technology plus cyber insurance cover for crypto firms.

• InsurAce covers adverse market reactions in crypto. For instance, the DeFi platform is paying claims to whoever has their UST De-Peg cover.

• Specialist digital assets insurer Evertas covers against crypto theft, E&O and business interruption due to blockchain failure.

• Nexus Mutual covers against loss of funds. But, the claim is paid only after an approval by the platform members.

• Parametrix offers insurance against losses due to server outages.

• New entrant Amulet will cover users against crypto hacks.

Crypto exchanges have also started to proactively take covers. This is primarily for cyber hacks.

• Binance has built a $1 billion insurance fund to protect against cyberattacks.

• Gemini has insurance against crypto theft from direct breach. But it won’t be responsible if your individual wallet is hacked.

• Coinbase has coverage to protect against cyber theft. But in case of large hacks, it has cautioned that ‘some funds may still be lost’. Again, there’s no insurance if someone hacks into your wallet.

Even traditional brokers such as WTW (formerly Willis Towers Watson) are setting up teams for digital assets insurance. Interestingly, insurers are also beginning to invest into crypto. The demand is picking up.

The covers are not very expensive. It is available for ~1% of the asset value. For instance, an exchange with $500,000 of crypto funds can buy an annual cover for $5,000.

Widening the insurance netThe crypto market cap stands at~$1.2 trillion. A small crash could wipe out millions. Mainstream insurers such as Allianz are open to the idea. A few insurers such as Bermuda’s Relm and Lloyd’s of London affiliated entities are taking on crypto risks. A vast majority, however, are still cautious.

Crypto investments are finding favour with the young and the old alike. And soon, absence of insurance could become a deal-breaker.

Coinbase Hits Pause

Coinbase says it is left with little choice. The crypto exchange is indefinitely extending its hiring freeze. That’s not all. Job offers will also be rolled back.

Ripple effects Coinbase isn’t the only one to take drastic measures. Here is what others are doing:

• Gemini is laying off 10% of its workforce.

• Latin America’s Bitso has sacked 80 employees.

• Argentina’s Buenbit has laid off 45% of its staff.

The choppy weather is not just because of the crypto market crash. A tech-led slowdown is adding pressure. Gemini’s co-founders Tyler and Cameron say that ‘crypto winter’ is here.

Now a ban tooThere’s also bad news for crypto miners. A two-year ban on all new PoW mining projects in New York is now in place.

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Who are we? There is a lot happening in our world. Everything has layers, and each layer has to be carefully peeled so you, the reader, know how the world of money is changing every day. That’s our promise. Help you unpeel the onions, which are the public markets in the US, India, and crypto, so that you know just a little more.