Financial News Hannah Petersohn: Crypto Insurance: Protective Coverage for Bitcoins?

Hardly a day goes by without a report on cryptocurrencies. Sometimes it is the almost unbelievable price fluctuations that keep investors on their toes. On another occasion, it is the tweets of Tesla entrepreneur Elon Musk that fuel the run on digital currencies. A recently passed law now allows institutional investors to invest up to 20 percent of their volume in Bitcoin and Co.

With more and more private investors and companies investing in cryptocurrencies, the question is how to secure digital currencies against the increasing attacks of hackers and, above all, which of the more than 6,500 existing currencies (as of September 2021)? “Insurance companies should look at Bitcoin and Ethereum first. This covers 70 percent of the entire cryptocurrency market,” says expert Philipp Sandner, director of the Frankfurt School Blockchain Center (FSBC).

A year ago, insurance giant Lloyd’s partnered with insurer Atrium to launch a policy for UK customers to protect cryptocurrencies against theft or other malicious attacks. But in this country there is little experience with crypto insurance. “Even brokers are unfamiliar with the subject,” says Jan Blumenthal, chief representative of Lloyd’s Germany. But: “Consistent with cryptocurrencies increasing market share, insurance options will also increase.” Insurance companies are currently testing how coverage can work in this area.

Researcher Sandner suspects that this cautious approach is mainly due to the complexity of the subject. “Only 15 to 20 percent understood cryptocurrencies and the technology behind them,” says Lloyd’s man Blumenthal. “There is a great danger of getting the reasoning wrong or not fully mapping the risks.” That is why it is necessary to hire external IT consultants who, in the event of a claim, explain to the insurers what specifically happened. The problem with this: “There are too few.”

Home content policy falls short

However, crypto policies are complex for another reason: “According to current case law, they are not defined as an ‘item’ under §90 BGB and are therefore not automatically included in the insured elements of home insurance,” he explains. Alina Sucker, Underwriting. Manager Art & Private Clients at Hiscox, an insurer specializing in cybercrime. This means: First, a separate definition would have to be created in the terms of the contract. “A claim related to cryptocurrencies is usually attributed to cyber damage and therefore has little to do with the claims processing of classic household goods coverage, in which, for example, theft is also insured. of cash,” says expert Sucker.

In view of the still manageable market and the huge need for clarification, developing an expensive experience doesn’t seem very profitable at first. Blumenthal and Sandner are convinced that cryptocurrencies will continue to accompany us. Consequently, those insurers that are already dealing with the issue will have an easier time in the future. However, everyone is very reticent about the current offer in terms of crypto policies, and MunichRe does not want to comment on the matter. Other companies said to have crypto policies in their portfolio have also remained silent. “The moderation also affects the Lloyd’s market. Everyone wants to gain experience first and not create false expectations”, assumes Blumenthal.

The axis: the password

But how can cryptocurrencies be secured? To answer this question, you first need to understand how coins are stored. “You can have them directly, for example, on a USB stick in your drawer at home, then the USB stick would have to be secured. Or store the bitcoins on a crypto exchange like Coinbase, BSDEX, Nuri or, in which case they would have to be insured through the exchange,” explains researcher Sandner. To obtain bitcoins, a complex password is required, a code made up of numbers and letters that users receive when buying crypto. “Password insurance is the axis: it’s about the safekeeping of private passwords,” Sandner explains. So an insurer would have to check how secure the password is stored. But that’s almost impossible in the private sector because no one can control who has access to the password. “It would be like trying to secure a safe for a gun that you don’t know where it is, if it’s locked, or if it’s easy to get out.”

However, Hiscox offers exactly one such private customer policy, namely as part of a “cyber coverage covering cryptocurrency theft with up to €10,000,” according to Underwriting Manager Sucker. “We trust our customers to be careful with their virtual currencies.” But the extent to which trust alone is enough to secure the “cryptocurrency closet” remains to be seen. Especially since 10,000 euros is marginal if you look at the current daily value of a bitcoin, which is almost 40,000 euros (as of September 14, 2021).

Crypto Trading Policies

Blockchain researcher Sandner believes that crypto policies in the commercial sector are easier to implement anyway. Insurers could examine the technical conditions and ask, “Is the password in a safe or on a manager’s desk?” This means that a crypto policy is closer to classic IT insurance. According to crypto expert Sandner, the amount of damage caused by a hacker attack can be determined based on the daily price of bitcoins at the time of the theft. And since blockchain technology makes it possible for everyone to see who owns how many bitcoins, it would be easy to prove ownership to the insurer.

In Germany, cryptocurrencies were subject to the Federal Financial Supervisory Authority (BaFin) at the beginning of 2020. Since then, any company that trades and stores cryptocurrency has required permission from BaFin. “Such regulations increase the security of cryptocurrencies. At the European level, the so-called MiCa (“Markets in Crypto Assets”, editor’s note) regulation will come into force at the end of 2022, which will create uniform rules across the EU for dealing with cryptocurrencies and assets. .explains Sandner. Meanwhile, Bitcoin was recently approved as an official means of payment in El Salvador, accompanied by another drop in the price of the cryptocurrency.

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