Aon PLC, Marsh LLC, and Gemini to set up captive insurer Nakamoto Ltd. in Bermuda.
The recent lack of insurance cover for crypto assets plays a major role in the inability of the cryptocurrency industry to receive mainstream adoption.
For this reason, New York-based crypto-asset exchange Gemini has announced an increase in insurance coverage of its custody platform, offering investors a $200 million fund in coverage for its custody business. The Winklevoss twins, founders of Gemini Trust Co. LLC, want to create the right conditions allowing bigger spenders and institutions to be able to invest in cryptocurrencies and enjoy the benefits of their custody services.
Big investors and institutions typically want to invest in the cryptocurrency sector, without being exposed to any security problems and therefore require more security solutions. They prefer institutional-grade cold storage solutions, covered by an insurance policy, to allow them a safety net when exposed to the new sector.
"Gemini is the leading crypto-native finance platform serving institutions. Our solutions meet the complex, high-stakes requirements of institutions without cutting corners on security, speed, or support."
Gemini is a fiduciary and is subject to the capital reserve requirements, cybersecurity requirements, and banking compliance standards set forth by the New York State Department of Financial Services (NYSDFS) and the New York Banking Law.
The broader insurance sector can not deny cryptocurrencies anymore and have chosen to start entering the market by increasing its insurance capacity so the industry can grow.
The Gemini platform is available to customers in a total of 49 U.S. states, Washington D.C., Puerto Rico, Australia, Canada, Hong Kong, Singapore, South Korea, and the United Kingdom.
What does insurance mean for the cryptocurrency sector?
There are many types of scams in the cryptocurrency industry, ranging from fake exchanges, mining schemes, HYIP, pyramid and Ponzi schemes, auto trading robots, fraudulent account managers and many other types of scams.
During the decade of Bitcoins' and other cryptocurrency's existence, many investors, large and small, have fallen into the traps of people taking advantage of the complexity of this industry.
Shortlist of scams:
- Mt. Gox: In 2011, a fraudulent breach of the Mt. Gox cryptocurrency exchange, caused the price of BTC to drop to $0.01. A hacker was able to use the credentials of a Mt. Gox auditor and transferred a huge number of Bitcoins to himself. Afterward, he created a massive "ask" order at any price and unloaded his Bitcoins.
- Kraken hack: Bitcoin exchange Kraken was hacked and 1200 Bitcoins were stolen. The following flash-crash caused a sharp Bitcoin price fall from $8,400 USD to $75 USD.
- Binance hack: In 2019, a hacker was able to steal more than 7000 Bitcoins and compromised the two-factor confirmation codes and API tokens of accounts with high net-worths.
These exchange hacks and other forms of fraud have stopped institutions to seriously thinking about investing in the sector. For institutions, buying Bitcoin and/or other cryptocurrencies using vulnerable exchanges is not a viable option. They require access to their funds at all times, making the entry of the insurance sector into the crypto market essential for the next phase of adoption: institutional investors.
What kind of insurance is needed and are you covered?
Every year, about $600 Billion is lost to cybercrime and experts claim that these crimes are rising every year, reaching new heights. This means that 14% of the industry is exposed and money lost forever.
Cryptocurrency exchanges are vulnerable and at least 30 high-profile cryptocurrency exchange hacks have happened since Bitcoins inception.
But it is not just the exchanges, the crypto industry as a whole is widely perceived to be risky, immature and prone to scams.
The best kind of insurance is one that specifically covers cryptocurrency losses, compared to a standard cybercrime insurance. As most lost cryptocurrencies never return, the only way to be compensated is through a good insurance policy. This also means that you need to investigate the exchange you use. Are they insured?
There are huge opportunities for insurance companies and growth is projected to tenfold over the next five years.
As digital assets become more relevant on the internet of value, insurance companies are looking to cash in on the projected growth in the next decade. Insurance companies that are ahead of the curve stand to benefit the most. The focus lies on cryptocurrency custodial services, allowing bigger investors to be secured and know their investment is safe and insured in case funds are lost.
Since insurance companies demand access to the exchange's business operating standards and insight in how assets are stored, exchanges with fraud in mind will most likely not invest in insurance policies. This will clean up the sector over the coming years.
Insurance companies will also demand that the exchanges follow the AML (Anti-Money-Laundering) standards.
Which insurance companies are already active within the cryptocurrency market?
This is a shortlist:
- Marsh & McLennan;
- Aon (Gemini);
- American Insurance Group;
- XL Catlin (BitGo)
The overall cryptocurrency sector lacks insurance.
Despite sometimes unfaithful claims, most of the current operating crypto-exchanges do so without any insurance. My advice to people is to store their cryptocurrencies on cold wallets since over 95% of exchanges lack the responsibility to cover their clients' well being.
If these exchanges don't move to ensure their client's well-being, the regulators will hopefully step in and force laws to do so.
There are signs, however, that most exchanges realize they have to mature, yet run into the problem of actually finding insurance companies that understand the sector.
I conclude that the sector is changing, as well as the giant insurance companies, to develop products for the individual crypto investor, exchanges as well as institutions.