Skip to main content

Source: Сointеlеgrаph

Insurance is the key to the financial security of important assets. However, the crypto sector, which is projected to reach $4.94 billion in global market size by 2030, may be lagging behind when it comes to digital asset insurance.

For example, it has been noted that less than 1% of all cryptocurrency investments are currently insured. This statistic is alarming given the rapid growth and high risks associated with today’s cryptocurrency market.

Ben Davies, head of the digital asset group at Superscript — a UK-based startup and London-based Lloyd’s-licensed insurance broker — told that crypto has been marginalized when it comes to insurance solutions.

“Superscript has been insuring new technology areas for years. I lead a team that is purely crypto, and never in my career have I seen a more marginalized industry,” he said. While the crypto sector is growing, Davis believes it still lacks insurance solutions due to the industry’s strong financial focus. He said:

“Crypto is about something very fundamental, which is money. But, as a society, we tend to avoid this topic. When the tech sector focuses on the complex issues of value and exchange of money, insurance agents tend to walk away from that conversation.”

Growing need for crypto insurance

While it may be, the need for insurance solutions in the crypto industry is becoming more important than ever before. To fill this gap, Davis explained that Superscript is using a centralized approach to bridge the gap between traditional insurance providers and crypto companies. “We are shifting the risks associated with digital assets to the wider insurance community. Everyone in our team owns and interacts with cryptocurrency, so we speak the same language,” he commented.

As Lloyd’s broker, Davies said the firm has experience in acquiring clients from several insurance companies. As such, the firm is taking a centralized finance (CeFi) approach by providing crypto companies to insurance companies suited to their needs. “We are working with many non-fungible token organizations or crypto companies partnering with established entertainment players to help secure contracts with traditional insurance firms. We provide insurance for the full spectrum of digital asset business, including tokenization platforms, miners, custodians, blockchain developers and more,” he shared.

Regarding the process involved, Davis explained that Superscript helps educate insurers about the risks associated with cryptocurrencies so they can work with digital asset companies. Like most traditional insurers, Davis noted that crypto insurers will charge premiums in fiat currency rather than crypto. “We are currently looking at ways to innovate to make this process more convenient for our customers,” added Davis.

While Superscript aims to bridge the gap between traditional insurers and crypto companies, a number of decentralized finance (DeFi) insurance solutions have also been implemented. Dan Thomson, CMO of InsurAce.io — a decentralized financial risk protection protocol — told that while crypto insurance is broad, it essentially means that crypto users are protected from certain risks and catastrophic losses for their portfolios. “This is a financial insurance tool that has emerged in the wake of a multi-trillion dollar market,” he said.

With that in mind, Thomson explained that InsurAce is looking to eliminate the inherent risks associated with DeFi protocols. For this, Thomson mentioned that InsurAce works by allocating pledged capital in its protocol as an insurance capability. DeFi users can then buy this capacity to cover their investments and assets hosted on various protocols. “For example, in the event of an exploit, customers can submit a claim through the InsurAce app. The decentralized organization, or DAO, will then vote on the legitimacy of these requirements,” Thomson said.

Although this process is different from traditional insurance solutions, it has proven to be effective. InsurAce’s largest payout came when the Terra ecosystem collapsed in May 2022, Thomson said.

Recent: Does Ethereum Merge Offer a New Direction for Institutional Investors?

“In total, we received 180 applications. InsurAce paid out $11.7 million to 155 TerraUSD Classic (USTC) victims,” he said. About 8% of USTC InsurAce payouts were made in stablecoins, while 60% consisted of Tier 1 tokens, and the remaining 4% was paid out in platform INSUR tokens. The process took one month, Thomson said, which is typically faster than payouts processed by traditional insurance companies.

Given the decentralized nature of the crypto sector, it is not surprising that other projects are focusing on DeFi insurance. Adam Hofmann, founder and CEO of decentralized insurance protocol Nimble, told that digital assets need to be backed by insurance in order for the crypto sector to flourish. After 22 years in the traditional insurance sector, Hofmann founded his firm in June 2021 with the goal of making the insurance process more democratic.

Hofmann explained that Nimble is applying traditional insurance concepts to decentralized finance. For example, the platform is built on the Algorand blockchain and works to power Algorand-based DeFi projects. But like traditional insurance companies, Hoffman explained that Nimble is made up of underwriters, claims adjusters and loss adjusters who are pooled together to help create “risk pools.”

“A risk pool is similar to a liquidity pool, but it involves retail and institutional investors who allocate money to subsidize insurance risks. This creates a more democratized insurance process,” he said.

Hofmann added that Nimble works directly with clients to gather critical underwriting information. This data is then published on the Nimble portal, allowing users to purchase insurance for specific DeFi platforms.

“If users deposit cryptocurrency on a platform we support, they can purchase insurance at a certain price. This premium goes into the risk pool for this project and clients receive a non-fungible token in their crypto wallet representing this insurance policy,” he explained. Hofmann mentioned that in the event of a DeFi hack, customers will be notified immediately and receive crypto payouts directly to their wallets after community and smart contract approval.

Indeed, democratization seems to be a common theme among crypto insurance providers. For example, Nexus Mutual is a discretionary mutual company that currently covers millions of dollars in Ether (ETH) for various DeFi projects.

Hugh Karp, the firm’s founder, told that the platform is an automated version of a very old structure in which participants share risk. “The main issue that Nexus is addressing is the sharing of more and more risk in the cryptocurrency space, where coverage is not available in conventional markets.” Nexus does this by allowing members to decide how to assess risk as well as how to make claims payments, Karp said.

While this approach may be well-suited for the crypto industry, Karp noted that building trust with clients to ensure genuine claims are paid remains a challenge. “This can only be achieved with time and a track record. It’s also difficult to properly assess risk, and we’ve seen some other crypto insurance platforms run into this recently due to the collapse of Terra.”

Education is critical for DeFi and CeFi insurance to take off

Although some participants in the cryptocurrency ecosystem consider centralized approaches to digital asset insurance to be harmful, it is clear that both CeFi and DeFi solutions are needed. “Traditional CeFi insurers often have a bad reputation, but just this year I have seen more traditional insurers enter the crypto space than I have in the last five years of my career,” Davis said.

This has become a reality, especially as more institutional investors enter the digital asset sector. “Many of the companies we insure need financial support from traditional insurance providers that are regulated,” Davis said. The notion is also starting to resonate with DeFi providers. For example, Hofmann mentioned that Nimble is in the process of obtaining an insurance license through the Bermuda Monetary Authority to provide both DeFi and traditional insurance capital protection. In the meantime, Hofmann considers it important that the Algorand Foundation supports Nimble by providing platform certification to users.

Even with certificates and reliability, insurance of cryptoassets remains difficult. For example, a number of cryptocurrency exchanges have recently come under fire for making false insurance claims.

Last month, leading cryptocurrency exchange FTX received a letter from the Federal Deposit Insurance Corporation (FDIC) accusing the exchange of falsely suggesting that user funds were insured by the FDIC.

What’s more, Celsius, a cryptocurrency lending platform that recently went bankrupt, is facing legal action based on fake claims that users’ digital assets were insured. “The problem with the insurance industry is that it can be confusing. People, like organizations, sometimes don’t know what they’re actually insured against,” Davis said. Because of this, Davis believes, trust within an organization or an entire industry can be easily eroded.

Recent: Metaverse becomes platform for bringing fashion communities together

Industry experts agree that more education is needed to ensure smooth development. For Davis, this starts with teaching traditional insurance brokers how to handle cryptocurrency claims. DeFi-focused solutions, on the other hand, should aim to help investors understand what is at stake right from the start.

“For example, market volatility can create confusion. InsurAce also does not go through the KYC procedure for clients, but the protocol states that their assets are insured through us on their website. When the Terra incident happened, customers didn’t have a clear idea of ​​their coverage,” Thomson said. Given this complexity, Thomson believes that the vast majority of insurance coverage will be provided by crypto-native solutions.

“Risks are very new and require deep specialist knowledge that our members have. Some traditional providers have begun to dive into this area, but I suspect they will have a few false starts and progress will take quite a while.”

Source: Сointеlеgrаph

Leave a Reply