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The market for cryptocurrency has exploded in the recent past. The past couple of years witnessed a major rise and fall in the value of cryptocurrencies. This rise and the consequent fall in value was because of the rapidly oscillating investor interest. However, even after the drastic fall, cryptocurrencies are today valued much higher than they initially were. This is the reason why a lot of people still prefer to hold their assets in the form of cryptocurrency.
However, there is a big problem with using cryptocurrency. The problem is that it is very difficult to get insurance to protect against unforeseen events. For instance, a cyber-attack in a Japanese coin exchange led to a loss of more than $500 million. Another American coin exchange faced cyber theft and lost coins worth $70 million. The threats to the business are serious. However, it seems like the financial services industry as a whole is choosing to ignore this predicament.
Many insurance agents are aware of their consumer’s needs and hence are willing to provide insurance in order to tap the huge potential market. However, there are very few insurers who are willing to underwrite such policies despite their huge demand. The reason for this reluctance is the various challenges that insuring cryptocurrency brings along.
In this article, we will list down the various challenges pertaining to cryptocurrency insurance:
There are many challenges that are inherent in the process of insuring cryptocurrencies. One such challenge is determining the party that needs to be insured. Cryptocurrencies are purchased by buyers. However, the records are maintained by private exchanges. On the other hand, there are companies which specialize in providing digital wallets to the investors.
In the event of a cyber-attack, all of the above-mentioned parties will be at risk. Hence, while drawing up an insurance contract, it needs to be determined which party will be compensated in the event of a loss. Also, if multiple parties need to be compensated, it also needs to be determined the ratio in which they will pay their premiums.
Insurance premiums are decided based on past experiences. Data related to past experiences are collected and then using statistical operations, the probability of adverse outcomes is calculated. The problem with cryptocurrencies is that there is no such data available for making calculations. Also, it is not possible to predict advances in cyber technology.
The insurance company may decide on a premium today based on the current security setup and vulnerability to cyber-attacks. However, these probabilities might change with the advances in technology. Hence, insurance companies will also have to stay abreast with technological developments in order to cover the risks. Since such constant monitoring is not feasible for insurance companies, not many companies are willing to offer coverage to policies dealing in cryptocurrency.
Another issue commonly experienced with cryptocurrency policies is the currency in which the claim will be paid out. Insurance claims are commonly paid out in the currency of the country in which they were due. For instance, insurance claims in India are paid in Indian Rupees whereas those in the United States are paid in US dollars.
The problem with cryptocurrency is that it fluctuates in relation to fiat currencies. Hence, if 1 bitcoin is insured, it could be worth $17,000 on a given day, or it could be worth $10,000 on a different day. As such, the sum assured of the policy would be market driven and might change on a day to day basis. Obviously, this is not acceptable to the insurance companies. Also, this is not acceptable to many regulators since it becomes difficult to figure out whether an insurance company has kept aside an adequate sum of money as reserves or not.
One way to deal with the problem is to allow insurance companies to hold some amount of cryptocurrency in order to make these claim payments. However, many countries in the world are against the proliferation of cryptocurrencies, and hence this model may not be viable in those countries.
Insurance companies may have to set up entirely new entities which only deal with cryptocurrencies. Such entities can take payments as well make payments in cryptocurrency. This would eliminate the currency risk to some extent.
Also, it is a known factor that anonymity is of utmost importance to many people who are transacting in cryptocurrency. It is believed that many of these people are drug smugglers, criminals, corrupt politicians or other people trying to evade the law. The biggest reason that these people use cryptocurrencies is because of the anonymity they provide.
This concept of anonymity is not compatible with insurance. Insurance policies cannot be issued to unnamed beneficiaries. As a result, it is likely that cryptocurrency insurance will not be able to serve the needs of a large segment of investors who hold cryptocurrencies.
The bottom line is that there is a ready market of investors who would be more than happy to buy insurance for their cryptocurrency if they can find the right product. On the other hand, insurers are not able to provide policies because of reasons mentioned above.
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