An ever-increasing need for cryptographic insurance

An ever-increasing need for cryptographic insurance – Mail Bonus

The insurance industry has a long history of providing significant support for major leaps in innovation. It is no coincidence that the modern insurance industry and the industrial revolution coexisted. In fact, it has been convincingly argued that the invention of fire and property insurance – in response to the great fire in London – lubricated the investment capital that fueled the Industrial Revolution and is probably the reason why it began in London. Through this first and every technological revolution, insurance has provided entrepreneurs and investors with a safety net and served as an external, objective verifiable risk – thus acting as a source of both the incentive and security needed to test and break security barriers.

Today we are in the midst of a new digital financial revolution and the rationale for this new technology is clear and compelling. The recent White House Executive Order on “Ensuring the Responsible Development of Digital Assets” further underlined this and was a watershed for the industry, raising the debate about the importance of technology nationally and recognizing its importance for US policy, interests and international competitiveness.

Lack of crypto insurance

However, given the current encryption capacity, it is estimated at $ 6 billion – a fall in the asset class bucket of approx. 2 trillion market value – it is clear that the insurance industry is not keeping up and playing its important role.

This striking lack of collateral protection for digital assets was specifically referred to in the House Financial Services Committee’s hearing in December on the state of the market. If this condition persists, it risks hindering future growth and adoption.

Why have traditional insurers avoided entering this space despite obvious needs and opportunities?

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Traditional insurers face some fundamental barriers to responding to the new risk category offered by the cryptocurrency company. Fundamental to this is the lack of understanding of this often transparent technology. Even when there is a technical understanding, there are challenges such as correctly classifying new and nuanced types of risk – for example, those related to hot, cold and hot wallets and how countless technical, business and operational factors affect each of these. The problem is compounded by rapid changes in the industry, which is perhaps the best example of the emergence of new and sometimes confusing risk categories, such as inflexible symbols (NFT).

And, of course, many insurers are still licking their wounds caused by their haste to write cybersecurity policies in the early days of dot-com without fully realizing the risks and enormous damages that often result.

At the same time, according to Chainalysis, about $ 3.2 billion was secretly stolen in 2021. In the absence of risk mitigation options, that number is enough to give any responsible financial institution that is actually considering participating in this space serious heartburn. On the other hand, US banks generally lose less than $ 15 million each year because of the robberies. One of the reasons why bank robberies are so rare and impractical (with a success rate of only about 20% while giving the perpetrator an average of about $ 4,000 per incident) is that in order to operate, most US banks must be entitled to general bond insurance, which requires collateral measures designed to limit this loss. In this way, insurance not only manages the risk of damage due to robbery, but also creates an environment where it is much less likely that this damage will occur in the first place.

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The need for cryptocurrency insurance

The same applies to insurance against the loss of cryptocurrencies. The products stored in insured wallets are not only protected but are much less likely to be lost, to begin with, as the underwriting process makes such a high level of interdisciplinary expert scrutiny and demands for compliance.

The need for and benefits of mortgage insurance are obvious. However, given the circumstances, it is clear that traditional collateral is unlikely to step up to solve the cryptocurrency risk problem over a reasonable timeline. Instead, the solution must come from within. We need cryptographic solutions that are tailored to the needs of the industry, with the flexibility to cover the entire spectrum of cryptocurrency assets, products and services, including NFT, decentralized financial policies and infrastructure.

The benefits of home-made risk solutions are many.

Special crypto-insurance companies primarily possess greater knowledge and expertise in the industry, which enables them to achieve high-quality coverage, which in turn equates to increased security and safety for the crypto industry as a whole. Given this level of understanding, crypto-native insurance companies would be able to create risk mitigation products with the flexibility to meet the unique and rapidly changing needs of the industry. Then, once they are in place, these companies could expand their trillion-dollar insurance capacity by working in partnership with the traditional insurance market. Finally, a specific cryptocurrency insurance sector will better meet legal and regulatory requirements and ensure that the lack of collateral does not stop the adoption or growth of cryptocurrency.

In light of all this, what prevents crypto-native insurance solutions from popping up to solve the problem?

Ironically, in the case of cryptocurrency insurance, the industry predominantly chooses to direct its investment resources towards the cryptocurrency projects themselves, as future economics will be negatively impacted by the lack of collateral arising from the lack of investment in that space. .

That we are in the middle of a new technological revolution is undisputed. So is the fact that insurance has played an important role in helping previous technological revolutions reach their full potential. The great lack of cryptocurrency protection that exists today is unsustainable and poses an unacceptable threat. It is important for the cryptocurrency community to recognize the dangers posed by the status quo with the serious lack of cryptocurrency insurance.

The good news is that we have come a long way in solving this seemingly insurmountable technical and economic problem, and we believe we can do it again.

This article was co-authored by Sofia Arend and J. Gdanski.

This article does not include investment advice or advice. Every investment and business involves risk and readers should do their own research when making a decision.

The views, thoughts and opinions expressed herein are the sole responsibility of the authors and do not necessarily reflect or represent the views and opinions of the Cointelegraph.

Sofia Arend The Global Blockchain Business Council (GBBC) is currently the Director of Communications and Content. Prior to joining GBBC, Sofia worked for the North Atlantic Council, the top 10 international defense and national security agencies. Sofia received a Bachelor of Arts in International Relations and International Studies with honors from the University of Texas at Austin, where she competed as an NCAA Division-I recruiter.

J. Gdanski is an expert in privacy, security and risk management, a key leader in the blockchain business and the CEO and founder of Evertas – the first company dedicated to securing cryptocurrencies and blockchain systems.