Traditional Insurance for Crypto Assets Faces Significant Challenges: Experts
In the wake of a significant security breach at crypto exchange firm WazirX, resulting in the theft of over $230 million, other cryptocurrency exchanges are rolling out measures to protect customers’ wallets and funds. These initiatives may include compensatory funds to address losses from cyberattacks and theft, according to industry insiders.
However, experts argue that introducing traditional insurance products to protect crypto assets remains a formidable challenge for the industry.
“I don’t think there is any exchange which can claim that the funds are 100 per cent insured. We tried to get insurance in the past, but we did not get any provider who would be willing to insure these assets. It’s not an easy process,” Nischal Shetty, founder and CEO of WazirX, told Business Standard.
Coinswitch, another Indian crypto exchange, asserts that its custodial wallets are insured to prevent theft. “We store users’ crypto assets in industry-leading custodial wallets designed with advanced security measures to prevent unauthorized access or theft. Our custodial wallets are insured by reputed providers, offering an additional layer of protection,” said Balaji Srihari, business head of Coinswitch.
The absence of legislation mandating insurance for crypto assets compounds the industry’s difficulties.
“The lack of growth in India’s virtual digital assets’ (VDA) insurance sector stems from regulatory uncertainty and the absence of mandates requiring exchanges to insure the assets in their custody,” explained Navodaya Singh Rajpurohit, legal partner at Coinque Consulting and founder of Pravadati Legal.
Rajpurohit highlighted that the nascent stage of the crypto sector and the lack of clear classification for VDAs present significant hurdles for insurance companies willing to underwrite crypto exchanges.
“Ambiguity in classifying digital assets like Bitcoin, security tokens, and stablecoins complicates risk assessment. Without clear guidelines, insurers are unsure how to price these risks. This contrasts with some Indian exchanges that have insurance policies from digital asset insurers,” he noted.
Shetty from WazirX emphasized that the rapidly evolving nature of the crypto industry makes it difficult to secure comprehensive insurance coverage.
“Insurers also need to understand what the best practices for the industry are. They are evolving on a quarterly basis. The industry is new, and such incidents keep happening every three to six months, making it hard for providers to underwrite,” he added.
Shetty mentioned that WazirX has reached out to its wallet service provider, Liminal Custody, which it blamed for the security breach, to inquire if they had any insurance coverage over the lost funds. Cyberattacks on crypto exchanges or crypto thefts are common globally. According to a report from Chainalysis, 2022 was the biggest year for crypto hacking, with $3.8 billion stolen from cryptocurrency businesses.
Globally, some crypto exchanges have relied on specialized crypto insurance providers. For instance, UK-based financial services firm Lloyd’s offers an insurance policy to protect cryptocurrencies stored in online wallets against theft or digital heists. Introduced during the crypto boom in 2020, this liability insurance policy has a dynamic limit that adjusts with the price changes of crypto assets.
The policy covers losses arising from the theft of cryptocurrency held in online, hot wallets, as detailed on the company’s website.
“Following a massive security breach at WazirX, crypto exchanges propose client reparation funds. Experts discuss the challenges of traditional insurance for crypto assets amid regulatory uncertainty.”
