Cryptocurrency is digital money that can be used and traded over the internet, usually without government control, central oversight, bank involvement or the need for conversion to another monetary unit. Bitcoin is the first and most well-known cryptocurrency, but there are also others, including ethereum, litecoin, cardano, polkadot, stellar, dogecoin and binance coin.
Each of these is managed within a computer network dedicated to the use of that particular currency. Generally, anyone can purchase cryptocurrency after establishing an account with an individual brokerage, or “crypto exchange.” After cash is invested in that account, you simply place your cryptocurrency order and select a method of storage.
The spending and receipt of cryptocurrency are handled by an automated accounting technology called blockchain, which tracks your cryptocurrency account just like a bank balance sheet or ledger tracks physical money. A block represents a sum of currency owned by someone, and a line to another block represents the transfer of that currency to another party. When the transfer is executed, another block appears, representing the receipt of that money, hence creating a chain of blocks, or blockchain.
The use of cryptocurrency has been advertised as a secure way to move money. But because virtual accounts rely completely on the internet, theft and security breaches can and do occur. Cryptocurrency users are therefore exposed to potential data loss, data corruption, hardware disruption and significant financial loss.
While most cybercurrency exchanges provide some insurance options against cybercrime, the safeguards may be inadequate once you increase the amount of cybercurrency in your online wallet or use it as a business asset or ongoing method of payment.
Protection for online wallets
Cryptocurrencies are not legal tender backed by a government. Therefore, crypto accounts (wallets) are not protected by programs like the one offered by the Federal Deposit Insurance Corporation, which automatically repays up to $250,000 in each deposit account if an insured bank fails.
Beyond the potential failure of a crypto provider, there’s a risk of theft.
Although individual cryptocurrency accounts are isolated in their own blockchains, once a cybercriminal hacks into an exchange network, they can often transfer cryptocurrency into their own anonymous online account. Without serial numbers like those used with government-issued monies, virtual money can be difficult, if not impossible, to track. Some criminals may carry out large thefts in one motion; others may try to go undetected by transferring small amounts multiple times or by spreading thefts across many blockchains.
As cryptocurrency has increased in popularity and grown in value, so have threats of theft. In response, new types of insurance have been created. In fact, one of the world’s oldest insurance enterprises, Lloyd’s of London, was the first to offer cryptocurrency insurance. However, because this type of protection is still relatively new and the learning curve is quite steep for the industry, policy details can differ significantly by company.
Factors that may influence coverage include what country’s legal tender was used to purchase the cryptocurrency, and the security standards, historical performance, internal controls, and policies and procedures of the crypto exchange or custodian used.
Most cryptocurrency insurance is designed for and held by the crypto exchanges themselves, rather than private individuals or individual businesses trading in cryptocurrency. So you may need to secure your insurance through your exchange or cryptocurrency brokerage at the time of purchase.
How cryptocurrency insurance works
The payout limit on a cryptocurrency policy ultimately determines the total number of coins that will be covered at the time of a claim. This is because that limit is usually based on your initial investment and the number of coins you wanted to protect when the policy was purchased. With cryptocurrency values fluctuating by up to hundreds of percentages at a time, your actual financial recovery following a theft may be substantially lower than the going market price of the lost assets.
Some companies that offer cryptocurrency insurance will also provide risk mitigation tools, including data backup services, transaction monitoring to alert companies of suspicious activity, and audit trails for incident reporting and claim verification. They may also provide suggestions for optimizing the authorization settings on transaction approvals.
Cryptocurrency insurance typically will not cover any expenses associated with lost or damaged hardware. Nor will it cover losses that result from your own transfer of cryptocurrency to someone else or any costs related to the disruption or failure of the blockchain holding your cryptocurrency.
Because there is still regulatory uncertainty and lack of government oversight, cryptocurrency insurance will continue to evolve. More traditional insurance companies are developing their own solutions to serve individuals and businesses using cryptocurrency without being part of the virtual money industry itself.
What about other business insurance policies?
Even if cryptocurrency isn’t expressly mentioned as an exclusion in your policy, don’t assume that you’re covered for crypto losses.
Although some may argue that commercial property, cyber, commercial crime, money insurance and other specialized policies should apply to at least some aspects of cryptocurrency theft or data breaches, most of these policies require the policyholder to have custody of the lost assets. The fact is that cryptocurrency isn’t a physical asset stored on your business’s premises, nor do you have custody or full control over the data attached to your crypto account or its ultimate security.
Some insurance companies delineate between “money” and “virtual currencies” in their commercial policies, while others are adding broad exclusions along the lines of “any loss involving virtual currency of any kind, by whatever name used, whether actual or fictitious.”
While it’s likely that cryptocurrency will appear in more policy exclusion clauses in the future, for now it’s best to assume that it’s an excluded loss. If you decide to invest in cryptocurrency, it may be wise to purchase at least a minimum level of cryptocurrency insurance.
Going forward, ask your insurance professional to notify you of any new policy options, particularly those designed for direct purchase instead of purchase through your crypto exchange. And each time you make a significant investment in your online wallet, be sure to follow up with your insurance professional to make sure your policy rises to meet your new level of risk.