The insurance industry has a long history of providing vital support for making big leaps in innovation. It is no coincidence that the modern insurance industry and the Industrial Revolution arose in parallel. In fact, it has been strongly argued that the invention of fire and property insurance – in response to the Great Fire of London – lubricates the gears of capital investment that propelled the Industrial Revolution and is possibly the reason why it was in London. started. Through that first and each subsequent technological revolution, insurance has offered a safety net to innovators and investors and has served as an external, objective verifier of risk – both as a source of incentive and protection. To act confidently requires testing and breaking barriers.
Today, we are in the midst of a new digital financial revolution, and the case for this new technology is clear and compelling. This was further underlined by a recent White House executive order on “Ensuring the Responsible Development of Digital Assets” and was a momentous moment for the industry, raising discussions about the importance of the technology at a national level and in the United States. recognized its importance to strategy. interests and global competition.
Lack of crypto insurance
Nevertheless, with the current crypto insurance potential estimated to be around $6 billion – a drop in the bucket for an asset class with a market capitalization of approximately $2-trillion – it is clear that the insurance industry has failed to play and play its vital role. .
This striking lack of insurance protection for digital assets was specifically referred to in December’s House Financial Services Committee hearing on Market Conditions. Should this situation persist, it does so at the risk of hindering future growth and adoption.
Why have traditional insurers shied away from entering this sector despite the obvious need and opportunity?
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Traditional insurers face several fundamental hurdles in responding to the new risk class presented by crypto. The most basic of these is a lack of understanding of this often counter-intuitive technology. Even when technical understanding is present, challenges such as properly classifying new and subtle risk types – eg, hot, cold and hot wallets – are associated with the myriad technology, business and How are the operational factors – remain. The problem is compounded by rapid changes in the industry, perhaps best exemplified by the overnight emergence of new and sometimes confusing risk classes, such as non-fungible tokens (NFTs).
And of course, many insurers are still licking their wounds for writing cybersecurity policies in the early dot-com days, without fully understanding those risks and the often huge losses.
Meanwhile, according to Chainalysis, around $3.2 billion in crypto was stolen in 2021. In the absence of risk mitigation options, this number is enough to cause any responsible financial institution to consider genuine participation in this space a serious heartbreak. In contrast, US banks typically lose less than $15 million in legal heft each year. One reason bank robberies are so rare and unproductive (with a success rate of only about 20%, while netting the criminal an average of about $4,000 per incident) is that in order to operate, most U.S. banks need blanket bonds. Must qualify for insurance, which requires safeguards designed to limit these losses. In this way, insurance not only manages the risk of losses due to robbery, but also creates an environment in which those losses are initially very unlikely to occur.
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crypto insurance needed
The same applies to insurance against loss of crypto assets. Goods stored in the insured wallet are not only protected, but are much less likely to be lost, as the underwriting process entails such a high level of multidisciplinary expert scrutiny and compliance requirements.
The need and benefit of crypto asset insurance is clear. But given the circumstances, it is clear that traditional insurance is unlikely to take steps to address the crypto asset exposure problem at an appropriate time. Instead, the solution would need to be generated from within. We need crypto-native solutions tailored to the needs of the industry, with the flexibility to cover the full spectrum of crypto asset risks, products and services, including NFTs, decentralized finance protocols and infrastructure.
The advantages of home exposure solutions are manifold.
Primarily, dedicated crypto insurance companies have greater industry knowledge and expertise, enabling higher quality coverage which, in turn, equates to greater safety and security for the crypto industry as a whole. Given this level of understanding, crypto-native insurance companies will be able to design risk mitigation products with the flexibility to meet the unique and rapidly changing needs of the industry. Then, once established, these firms can expand insurance capacity on the order of trillions of dollars by working in partnership with the traditional insurance market. Ultimately, a dedicated crypto insurance sector will better meet legal and regulatory requirements, ensuring that a lack of insurance does not inhibit the adoption or growth of crypto.
In light of all this, what is stopping crypto-native insurance solutions from moving forward to solve the problem?
Ironically, in the case of crypto asset insurance, the industry is choosing to direct its investment resources towards the very same crypto projects whose future viability is negatively affected by the lack of insurability resulting from a lack of investment in that space. Will be ,
We are in the midst of a new technological revolution, it cannot be denied. So, too, is the fact that insurance has played a vital role in helping past technological revolutions meet their full potential. An extreme lack of crypto asset risk protection exists today and is an unacceptable threat. It is important that the crypto community recognizes the danger posed by the status quo along with a serious lack of crypto asset insurance options.
The good news is that we’ve overcome it by solving insurmountable technical and economic problems ourselves, and we believe we can do it again.
This article was co-authored Sofia Arendo And J. dansky,
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.
The views, opinions and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Sofia Arendo Currently lead communications and content at the Global Blockchain Business Council (GBBC). Prior to joining GBBC, Sofia worked for the Atlantic Council, a top 10 global think tank for defense and national security. Sophia received a Bachelor of Arts in International Relations and Global Studies with high honors from the University of Texas at Austin, where she competed as an NCAA Division-I recruiting rower.
J. dansky is a privacy, security and risk-management specialist, a leading leader in the enterprise blockchain space, and the CEO and founder of Evertas – the first company dedicated to the insurance of crypto assets and blockchain systems.