ear markets, it is said, are a time to concentrate on building. In other words, now is the time to avoid the more visible work of fundraising and partnerships in the best interest of the more quiet work of product innovation.
The opposite has been true for USI, one of the world's largest brokerage firms. The firm's digital asset team is making a coordinated push for clients and deals during this time. Since 2019, USI has been quietly building a group of 40 people specializing in digital assets and fintech risk.
Brokers act as a go-between for customers and companies. Their role is to represent the insured and help them find the best policy for their needs. Clients are rarely directly contacted by insurance companies.
Because of its youth and volatility, the digital assets sector is terribly underserved by the broader insurance market. According to a Bloomberg Law article, broker Aon expects the crypto market insurance rate to be less than 2%.
However, firms are beginning to recognize the value of insurance, and demand is increasing. In addition to USI, specialized insurance companies such as Evertas and Relm have emerged to provide crypto-specific policies.
Nonetheless, many smaller businesses find these policies prohibitively expensive. Some even question whether they are worthwhile.
Controlling a Crypto-Wild West
Firms may seek insurance for various reasons, including asset replacement or property protection for data centers and miners. Security for digital asset firms could have been challenging to sell last year at the height of the bull market. The market was a "Wild West," according to Dave Roque, USI's head of digital assets insurance.
"Do we want to purchase insurance? Perhaps yes, maybe no," Roque said, remembering conversations with clients ranging from major exchanges to mining industries. As the market deteriorated, that mindset shifted dramatically.
Crypto has been in a bear market since around the beginning of this year. As investors wrestled with increasing interest rates, surging inflation, and geopolitical tensions, the value of trendsetter digital assets such as bitcoin and ether plummeted by more than 50%.
The industry began to unravel as a result of multiple macro challenges. TerraUSD (UST), a popular algorithmic stablecoin, has collapsed, carrying an estimated $40 billion worth with it. Several crypto lenders found it difficult to navigate the ensuing liquidity crisis. Players such as Celsius and Voyager halted withdrawals, stranding thousands of retail customers.
Cyberattacks on protocols and projects have also increased this year. According to a Chainalysis report, $1.9 billion in cryptocurrency was stolen in July, compared to $1.2 billion in July 2021.
Whatever the motivation, businesses are now actively working to become adequately insured. According to Roque, USI has seen a 350% upsurge in client acquisition in the last year, with all of the clients being fintech or companies.
The early adopters
Not every company remained until the market crashed to get insurance. Since 2019, USI's digital assets team has been serving customers.
According to Roque, the policy included multiple exposures, coverage for choices taken by executives and directors, with no limit on crypto, and industry-specific exposures such as loss of funds, breach, and embezzlement.
Specialist firms such as Evertas and Relm have emerged to serve clients. They provide insurance for everything from theft and loss in connection with crime and custody to more specialized services such as coverage for disabling smart contracts and losses incurred when a staking validator is "slashed" for what the network considers harmful behavior.
Is it worth it?
According to Joseph Ziolkowski, co-founder, and CEO of Relm, an insurance company for emerging markets, getting a good quote is based on several core elements such as the company's management team, employee turnover, income statement size, civil suits history, and capital mobilization initiatives.
However, for those who can obtain insurance, it is debatable how useful the policies are due to how prescriptively insurance providers address the outlined risk factors and possible exposures.
Companies, for example, are frequently required to detail their policies and procedures and the risk factors associated with them. The majority are self-declared activities that are nearly impossible to monitor, according to Wave Financial's Siemer.
What do you think about crypto firms getting insurance? Will it be a good path? Or may it cause underlying problems in the future? Let us know your thoughts by sharing this article on social media.