Crypto Insurance Providers: Assessing Risks and Ensuring Security
Cryptocurrency insurance providers take extensive measures to evaluate the risks associated with insuring a crypto platform. According to an insurance executive, these providers analyze over 2,000 variables across 20 risk areas before considering offering coverage. However, despite their meticulous assessments, most crypto insurance providers do not offer assurances to individuals, as highlighted by insurance and crypto executives in a discussion with Cointelegraph.
In recent years, the crypto industry has experienced a surge in theft, with a staggering $3.9 billion stolen from crypto companies, decentralized finance platforms, and users. This represents a 22% increase compared to the previous year, and experts warn that 2023 might bring even greater challenges.
Raymond Zenkich, the president of Evertas, a cryptocurrency insurance firm, explains that assessing the risks associated with a crypto platform is a complex process. It begins with underwriting, which involves evaluating and analyzing the risks associated with insuring the platform's assets. This evaluation is based on a detailed application form that considers 2,000 variables across 20 different risk areas.
One crucial risk factor is key management, specifically how keys are stored in different types of wallets—hot, warm, or cold. Interestingly, prior to our initiative, there was no standardized definition of hot versus warm wallets. The development of such standards is one way in which insurance contributes to the maturation of emerging markets.
Zenkich emphasizes that the assessment process doesn't end there. In fact, there are various gradations of hot and warm wallets, each with its own unique risk profile. This differentiation ensures a comprehensive evaluation of the storage risks involved.
An incident that occurred on April 14 serves as an example of the vulnerabilities faced by crypto platforms. Bitrue, a cryptocurrency exchange, fell victim to a hot wallet exploit, resulting in the theft of approximately $23 million worth of crypto assets. It is important to note that the compromised hot wallet held less than 5% of the exchange's overall funds, and the remaining wallets remained unaffected.
After assessing the storage risks, insurance providers like Evertas proceed to evaluate thousands of business, technology, and operational variables. This evaluation helps determine the appropriate premium to charge for assuming the associated risks. Once all the relevant questions are answered, the insurance provider can calculate the premium that justifies taking on the risk.
However, it is worth noting that crypto insurance providers are often hesitant to insure individuals who do not hold their assets on an exchange. These individuals, who utilize self-custody or other means of asset storage, face difficulties in providing evidence of loss to the insurance provider. Establishing proof of loss becomes a critical factor in determining the legitimacy of the claim.
Adrian Przelozny, the CEO of Australian crypto exchange Independent Reserve, explains that their insurance coverage is limited to assets held on the exchange platform itself. However, customers have a direct relationship with the insurer and can opt for 100% insurance coverage for a nominal fee during the signup process. The insurance contract is comprehensive, covering various events such as hacks and theft caused by the exchange's team.
In contrast, Binance, a leading cryptocurrency exchange, manages its emergency insurance fund, known as the Secure Asset Fund for Users (SAFU), internally. This fund, established in July 2018, aims to safeguard users' interests in the event of verified losses resulting from vulnerabilities or deficiencies in Binance's security systems or protocols. SAFU acts as a protective measure and provides coverage for users affected by such incidents.
Simon Dixon, the CEO of online investment platform BnkToTheFuture, believes that traditional insurance providers can learn from their crypto counterparts to enhance their practices. He highlights the potential for improvement through the utilization of smart contracts, making insurance more accessible and transparent to all. The implementation of smart contracts could lead to an evolution in the insurance industry, although it may come with its own challenges.
In conclusion, the evaluation and assessment process carried out by crypto insurance providers is rigorous and extensive. With the evolving landscape of the crypto industry, it is crucial for these providers to continually adapt and enhance their risk assessment methodologies to ensure the security and protection of their clients' assets.