Understanding crypto insurance and how it helps protect investors

As crypto insurance is relatively new, there aren't many providers yet in the market. The big one today is Lloyd's, which works with its agencies to provide crypto insurance for users and exchanges.

Fiat currencies are backed by governments and highly regulated. This provides greater scope for insurance cover. For instance, in the US, all bank accounts have in-built insurance from the FDIC that compensates clients for up to $250,000 if their money is stolen. This same thing cannot be applied to crypto because there is no central authority backing crypto that can take the step — the closest we get is crypto exchanges.

The need for crypto insurance increased manifold as crypto is no longer limited to digital currency projects — we now have the complications of DeFi protocols, the GameFi industry and a plethora of dApps. Not to mention, even more elaborate scams that people can easily fall for.

While most of these platforms have bug bounty programs and encourage cold crypto storage to protect their users, there is still a chance of an attack where investors may lose all their holdings. Keeping this in mind, several top crypto exchanges have begun to opt for insurance plans to safeguard funds and investor interests.

The only issue is that very few insurance providers cover crypto exchanges. As such, only the top trading platform offers this benefit to their customers. For instance, Coinbase offers crypto crime insurance "that protects a portion of digital assets against losses from theft, including cybersecurity breaches."

Another one of the top exchanges, Crypto.com, has a crypto crime insurance policy that covers up to $750 million worth of digital assets. The policy is backed by Arch Underwriting at Llyod's Syndicate and provides direct and indirect custodian coverage. The policy is the largest coverage plan by a crypto exchange, a title previously held by BitGo, which had a cover of up to $700 million, also from Lloyd.

Binance, the largest crypto exchange in the world, has adopted a completely different route to crypto insurance. The trading platform has established its Secure Asset Fund for Users (SAFU), which protects users' interests. As of January 2022, the Binance SAFU held over $1 billion. These funds were accumulated by tucking away 10 percent of every transaction fee.

1. Volatility: Cryptos are volatile, and even the big ones drop more than what's seen in other assets like stocks and real estate. This volatility is part and parcel of crypto investments and is not covered by crypto insurance.

2. Lost wallet: If you lose your key and the crypto in the wallet is lost forever, you cannot claim insurance for it. This is a very common occurrence in the crypto world, and it doesn't make sense for crypto insurance to directly cover it. Some insurance providers insure wallets as long as the keys remain with them.

3. Phishing scams: When you're clicking on suspicious emails or letting someone suspicious access your wallet, the insurance providers feel no need to compensate for your losses. Phishing scams don't work unless the victims have a role to play.

However, crypto insurance does cover mass hacks where millions are lost, and user data is compromised. It is one of the situations where it is entirely out of the hand of the user to prevent such a thing — and here's where a crypto insurance cover rightly protects you.

Crypto insurance remains a relatively new field, but with more regulations, it might be easier for more players to get into the crypto insurance game. We might soon have more and more exchanges providing crypto insurance as a perk to their members. We might also have crypto insurance in the future that protects you with DeFi protocols and the web3 world.