Is Crypto Insurance the Next DeFi?
The growth of the cryptocurrency market has outgrown the infrastructure that supports it, leaving exchanges and marketplaces at risk of being hacked
The crypto market is a $200 billion industry that demands a level of insurance. So, is crypto insurance the next DeFi?
Why the need?
While the tech backing digital assets is pretty incredible, recent reports have shown that cybersecurity is still one of the most substantial threats to the industry. CipherTrace, a security research firm, estimated that more than $4 billion worth of crypto was lost to theft and fraud last year.
Binance, one of the world’s largest crypto exchanges, saw a large-scale security breach that resulted in hackers stealing $40 million worth of Bitcoin (around 4000 BTC at the time of writing). So it is important to stay safe and trade Bitcoin on reputable trading platforms but also to remember that it is better not to have funds on an exchange.
According to the exchange, the hackers used phishing and viruses to gain access to their hot wallets, containing around 2% of the exchange’s BTC holdings. Luckily, they had already created a Security Asset Fund for User (SAFU), which protected users and their funds against this kind of scenario. Established in 2018, the SAFU has been on the receiving end of 10% of Binance’s trading fees, that are then set aside in cold storage to be used in such cases.
Another story that shows the need for crypto insurance is the Bitfinex hack in 2016. Two Israeli brothers were arrested in June 2019, in connection to an attack that saw Bitfinex lose nearly 120,000 BTC (so around $72 million at the time). During 2019, at least 7 exchanges reported large-scale hackings. Bittrue – a crypto exchange based in Singapore, reportedly lost $5 million worth of XRP and Cardano.
These cases highlight the need for crypto insurance, given the growing prevalence of crypto attacks in the space. What’s even more shocking is that cybersecurity experts have shown that “such attacks can be carried out with far more rudimentary levels of self-taught skills.”
In a recent interview, Hartej Sawhney, co-founder of Zokyo Labs (a cybersecurity agency) said, “there’s an array of low hanging fruits for hackers,” adding, “you don’t need military training to conduct cybercrime on today’s centralized exchanges.”
The struggle of insuring digital assets
So, is crypto insurance the next DeFi? We’re not totally sure yet. However, major players in the insurance industry are emerging as leaders in this burgeoning market. Lloyd’s of London, one of the older insurance firms with a net worth of $45 billion, partnered with a top exchange to provide a $255 million insurance policy last year. Other crypto custodians who have purchased insurance include Anchorage, Kingdom Trust, and Gemini.
With billions at risk, the insurance industry can provide a level of confidence to crypto investors. Traditional insurers will help restore the confidence of investors in cryptocurrencies as a store of value. However, lack of sufficient regulation is a major issue. Traditional insurers are reluctant to offer protection to digital assets, until proper regulation is put in place.
Yusuf Hussain, Gemini’s head of risk, said that, “The biggest concerns from traditional insurers are rooted in the lack of regulatory clarity.” He adds:
“Thoughtful regulation in cryptocurrency will be the lynchpin for increased availability of crypto insurance. Done right, it can pave the way to healthy and sustainable markets and fuel long-term innovation that unlocks the promise of cryptocurrency and transforms society for the better.”
According to Hussain, the best way to ensure proper crypto insurance is to provide licensing while “building an institutional grade infrastructure that meets the standards established by traditional financial markets.”
So, crypto insurance is a thing
Is crypto insurance the next DeFi? Definitely not yet, although it certainly has the potential to be a huge market if regulators get on board.
At the moment, the crypto space is too fractured to really benefit from it and we’ll likely only see major exchanges and trading platforms actually taking out insurance policies.