Insurance for Crypto: Is it 'Hot' or 'Cold'
Key to insurance for cryptocurrency operations comes down to the difference between hot and cold. In the security context, “hot” and “cold” refer to types of wallets for crypto, with hot wallets being most vulnerable, and cold wallets being the safest.
Hot wallets
The biggest and most widely used cryptocurrency exchanges – such as Binance, Coinbase, Kraken and Gemini – keep just enough cryptocurrency in a readily accessible hot wallet to meet trading demand. Hot wallets live on the internet are more vulnerable to hacking or theft.
Hot wallets or warm wallets, which are simply hot wallets that let their users download their holdings, are much tougher to insure than cold wallets
The market for insuring hot wallets costs more for less coverage than most other assets – and even more than insurance against any real-world physical criminal theft or damage
Cold wallet
A cold wallet for cryptocurrency has taken the asset and printed a record of it for physical storage. It is offline, not connected to the internet, and contains the asset holder’s address and private crypto key for their holdings.
Cold wallets are no different to insure than any other physical asset such as a car or a house.,
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Cost of Insurance
Crypto Insurance market
Market for cryptocurrency insurance coverage stands at about$200 million, but that couldreach $1 billionwithin two years as more large insurers enter the business.
It certainly is rapidly increasing and would be increasing faster if more insurance capacity exists. Growth right now is constrained by market capacity rather than by interest or willingness to pay on the part of prospective insurance. A lot of companies in this space would buy more if they could, and if it were more favorably priced.
Insurers are working to develop an underwriting framework for cryptocurrency. This would augur well for increasing the size of the market, because certainly client demand has outpaced capacity
What is the cover
Insurance for hot wallets covers direct security breaches or hacks, or theft by employees. However, theft of digital assets by third parties, hacks of third-party systems or user-initiated fraudulent transactions are not covered.
Insurers are reluctant to cover cryptocurrency operations because of high-profile hacks that caused catastrophic losses, along with poor security policies and systems.Exchanges secures users’ hot wallets in offline cold wallets that are subject to FDIC pass-through deposit insurance.
Some insurers will use a version of errors and omissions policy coverage for cryptocurrency operations, but with significant exclusions. As with cybersecurity insurance, reinsurers like Lloyd’s of London are better able to take on such great risk.
Many insurers will give you a policy, but the policy doesn’t cover much. There are some exceptions, but many who have a cryptocurrency policy don’t realize that it’s not really covering a whole lot.
