Hunton Insurance Recovery Blog

Last week’s discussion focused on the evolution of the insurance marketplace for digital assets. This section focuses on the marketplace as it now exists, providing examples of products being bought by companies and consumers facing cryptocurrency risks. 

Cryptocurrency theft is no abstract concept. As Bloomberg reported in January 2022, “Crypto.com said customer accounts that held about $34 million in cryptocurrencies and cash were hit by unauthorized withdrawals. Hackers seized more than $80 million of digital assets from a blockchain extension by Qubit Finance last week.”^[1] And unlike bank accounts which are insured by the FDIC for amounts up to $250,000 per account, this insurance currently is limited to monies (viz., legal tender) in checking, savings and money market accounts at banks and does not extend to cryptocurrency holdings.^[2]

As in any marketplace, some companies are fully self-insured (or bare), some are partially self-insured, and some have considerable amounts of insurance though the nature, scope and amount vary widely.

Some of the major exchanges and custody providers reportedly have policies with $100+ million limits. 

For example, Coinbase reportedly has a $255 million crime policy available for losses sustained due to platform-wide breaches,^[3] warning investors in boldfaced type that its crime policy “does not cover any losses resulting from unauthorized access to your personal Coinbase account due to a breach or loss of your credentials.”^[4]

Bitstamp insures assets held in the BitGo and Copper wallets it uses (95% of its stored digital assets are in cold storage).^[5] This is supplemented by a $300 million crime policy issued through Lloyd’s and other companies which “applies to digital assets held at Bitstamp either offline or online and covers an array of crime-related cases. These include employee theft, loss while the assets are stored at any premises, loss in transit, loss caused by computer fraud or funds transfer fraud, as well as loss related to legal fees and expenses.”^[6]

Meanwhile, Blockfi has theft insurance through its custodial wallet Gemini.^[7] 

In addition to insurance policies providing crime coverage, the larger exchanges also may seek to transfer or mitigate their risk through other options. Some, like Gatehub, make insurance available through wallets, with customers having the ability to insure all or some of the contents.^[8] Others reportedly divert 10% of all trading fees into a self-managed fund. For example, earlier this year Binance Holdings Ltd. reported that it has been earmarking monies since 2018 and has accumulated a $1 billion “insurance” fund for its users.^[9]

The decision to obtain insurance or determining the appropriate coverage, may vary with how coins and wallets are stored. Some companies only cover “cold storage” because the coins are kept offline and are at lower risk of hacking. Other companies offer insurance for “warm” or “hot” storage (recognizing that online storage creates increasing levels of exposure and threat of potential hacks). 

Historically, most cryptocurrency insurance products were not targeted to consumers (i.e., individual traders). In early 2022, however, Breach Insurance Company announced the launch of a “Crypto Shield” product that reportedly is the first insurance product for crypto investors.^[10] This theft insurance, available in selected states, covers hacks of over 20 types of cryptocurrencies for customers using Binance US, Coinbase, CoinList and Gemini. 

Coincover provides security services and limited coverage for individuals holding assets in nearly 20 wallets and exchanges including Crypto.com, FTX and Coinbase.^[11] Among other things, it covers theft of digital currency resulting from a security breach or ack, employee theft or fraudulent transfer, with an insurance guarantee from Lloyds for loss of access or stolen funds. Coincover policies can provide a “dynamic limit” which increases/decreases in line with price fluctuations of cryptocurrency. “Standard” plans ($159 per year) provide up to $10,000 in coverage for lost or hacked funds from multiple wallets, a higher priced “Pro” Plan providing $100,000 in coverage ($749/year) for more wallets with higher levels of protection available upon request. 

Bitgo likewise provides detail on its website.^[12] It has secured a $250 million policy through Lloyd’s and other European companies covering digital assets “where the private keys are held 100% by BitGo Trust Company or BitGo, Inc. in the event of: Copying and theft of private keys, Insider theft or dishonest acts by BitGo employees or executives, [and] Loss of keys.”^[13] This insurance is provided at no cost to Bitgo clients who  may purchase additional insurance as needed.

In deciding whether to write a new line of insurance, and settling on the terms of coverage, insurers look for as much certainty as possible, considering analogous risks to assist in modeling and the availability of a robust set of regulations/rules. In the latter regard, future guidance and clarity from the SEC and the Office of Comptroller and Currency may be helpful in the underwriting process. 

As is apparent, insurance products have been and continue to be developed to cover cryptocurrency assets. There are several reasons to consider purchasing this insurance. It can serve the traditional purpose of reducing exposure through risk transfer. Insurer experience may assist in risk assessment/mitigation (though this may require audits and background checks). And it may assist the company in marketing the availability of insurance increasing the customer’s comfort level.

It is a truism in insurance underwriting that the threat or risk level materially and directly influences the cost; as one increases, so too does the other. 

Applying this concept here, premiums associated with cryptocurrency coverage are higher than for non-cryptocurrency related coverages. For example, an early article reported that $10 million in cryptocurrency theft coverage could cost 2% of limits as contrasted to 1% or less for traditional claims.^[14] More recently, FIT Small Business reported in December 2019 that while a standard crime insurance policy costs less than 0.5% of assets covered, cold storage premiums may be in the range of 0.8%-1.2%, and hot storage premiums in the range of 3-5%.

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This is the fifth post in the Blog’s Digital Asset Insurance Coverage series.

This post is an excerpt from an article written by Scott DeVries, Jessica Cohen-Nowak and Adriana Perez that originally appeared in the Journal on Emerging Issues in Litigation published by Fastcase Full Court Press, Volume 2, Number 4 (Fall 2022), pp. 255 – 276 (a comprehensive list of all references is provided in the published journal version).  

[1] Ben Bartenstein, Binance Builds Up $1 Billion Insurance Fund Amid Crypto Hacks, Bloomberg (Jan. 31, 2022, 5:58 AM EST), https://www.bloomberg.com/news/articles/2022-01-31/binance-builds-up-1-billion-insurance-fund-amid-crypto-hacks.

[2] How is Coinbase insured?, Coinbase, https://help.coinbase.com/en-in/coinbase/other-topics/legal-policies/how-is-coinbase-insured (last visited July 11, 2022).

[3] Marcos Cabello, Can You Insure Bitcoin? Here’s What You Need to Know, CNET (Feb. 23, 2022, 5:00 AM PT), https://www.cnet.com/personal-finance/crypto/can-you-insure-bitcoin/.

[4] How is Coinbase insured?, Coinbase, (last visited July 11, 2022).

[5] Marcos Cabello, Can You Insure Bitcoin? Here’s What You Need to Know, CNET (Feb. 23, 2022, 5:00 AM PT), https://www.cnet.com/personal-finance/crypto/can-you-insure-bitcoin/; We’re extending our crime insurance policy, Bitstamp (July 8, 2021), https://blog.bitstamp.net/post/were-extending-our-crime-insurance-policy/.

[6] Alastair Walker, Bitstamp Increases Crypto Insurance Limits With Paragon, Insurance Edge (July 10, 2021), https://insurance-edge.net/2021/07/10/bitstamp-increases-crypto-insurance-limits-with-paragon/.

[7] Dean Fankhauser, BlockFi Review Pros and Cons. Is BlockFi safe?, Bitcompare (June 1, 2022), https://bitcompare.net/reviews/blockfi.

[8] Brian O’Connell, Guide to Insurance on Cryptocurrency, Insurance Thought Leadership (Mar. 3, 2021), https://www.insurancethoughtleadership.com/emerging-technologies/guide-insurance-cryptocurrency.

[9] Ben Bartenstein, Binance Builds Up $1 Billion Insurance Fund Amid Crypto Hacks, Bloomberg (Jan. 31, 2022, 5:58 AM EST), https://www.bloomberg.com/news/articles/2022-01-31/binance-builds-up-1-billion-insurance-fund-amid-crypto-hacks.

[10] Breach Launches Crypto Shield, the Industry’s First Regulated Insurance Product for Retail Crypto Investors, GlobeNewswire (Feb. 15, 2022, 08:15 ET), https://www.globenewswire.com/news-release/2022/02/15/2385260/0/en/Breach-Launches-Crypto-Shield-the-Industry-s-First-Regulated-Insurance-Product-for-Retail-Crypto-Investors.html.

[11] A unique approach to securing your crypto business, Coincover, (last visited July 11, 2022).

[12] Digital Asset Insurance, Bitgo, https://www.bitgo.com/resources/digital-asset-insurance/ (last visited July 11, 2022).

[13] Id.

[14] Suzanne Barlyn, Insurers Begin to Offer Cryptocurrency Theft Cover, Tackling Risks of Growing Sector, Insurance Journal (Feb. 1, 2018).