What cryptocurrency insurance options are available to businesses today and what is right for you?
Cryptocurrency can be held in a number of different ways. Here’s an overview of insurance across the different options.
Exchanges are the primary place to buy or sell cryptocurrency – either by exchanging one cryptocurrency for another or exchanging fiat currency for cryptocurrency. While your funds are on an exchange, the exchange holds them on your behalf.
Cryptocurrency exchanges are highly prone to hacks with 7 major exchanges hacked in 2019.
Exchanges protect themselves against loss by holding the majority of their funds off line where it is less vulnerable to external hack. Many hold just 2% funds online. Exchanges either insure what they hold online or self-insure with their own balance sheets to cover any losses.
Exchange insurance only covers the exchange against losses their own security breaches or employee theft not thefts from your personal account.
Exchange insurance does not cover you in the same way a bank might if your card was stolen. This is your responsibility. Any losses resulting from the compromise of your own individual account are not covered.
Hot Wallets and Hardware Wallets
If you want to take your cryptocurrency off exchange, your alternative is to hold them in a wallet. There are two kinds available but insurance is still very rare:
- Hot wallets are held in an online environment and are the most common type available today. They allow easy, always available access to your cryptocurrency. This ease of use makes them appealing - but in some cases has resulted in them being easier to hack and steal funds.
- Hardware wallets also offer you direct access to the blockchain but hold your private keys in on a specially made microchip called a high-security module(HSM). These can offer robust security as you have your private keys held offline on a dedicated device. But for businesses operating at scale they can create operational complexity with multiple devices and physical storage to secure.
For more details please see: https://www.coincover.com/post/hot-wallets-vs-hardware-wallets
Some hardware wallets are starting to claim they are insured, but you can't insure yourself against theft from funds held using a hardware wallet.
If your hardware device is stolen and / or compromised you aren’t protected. This is also still the case for most hot wallets too. The world’s largest hot wallet provider was attacked in June 2019 and $27M in cryptocurrency stolen.
The first and only insured hot wallet on the market is a BitGo hot wallet protected by Coincover Theft Cover personal insurance protection.
Custodial cold storage
Custody services are secure and insured but only serve corporate investors. A third party like BitGo will securely hold the key to your wallet keys encrypted in offline,physical vaults. Custodial solutions require multiple sign offs to release the funds and typically 24-hours notice. Custody is regulated, highly secure and process heavy. It is designed for corporate clients looking to store large investments long-term.
As a result, it comes with a high price tag and investment limits in the $ millions. Custody is insured, in BitGo’s case up to $100 million per customer but like exchanges it is the custody provider not the customers themselves that are being insured. https://www.bitgo.com/services/custody.
Not all insurance is created equal and as a corporate customer you should expect at a minimum the following to be covered.
- Third-party hacks, copying, or theft of private keys
- Insider theft or dishonest acts by company employees or executives
- Loss of keys
So which insurance option is best for your business?
As business, you will most likely need a combination of hot and cold storage. A popular option is to use custodial cold storage to hold your long-term investments safely and insured. When researching insured custody providers, remember you are giving up control of your funds, so it is important to ensure a number of key requirements are met and that the custodian has the appropriate level of transparency in its policies and processes:
- Are all appropriate regulatory and compliance procedures in place to ensure your funds are safe?
- Who are the underwriters for the policy and are they A-rated with sufficient level of solvency?
- Which digital assets are covered?
- What is the cover limit? Is this in aggregate or per policy?
- How much will you receive in the event of a theft?
- Are there any deductibles?
- Is the insurance on a fully insured or co-insured basis?
- Does the policy cover insider theft by executives of the custodian?
You will also need to manage day to day activities such as investing, payroll and paying suppliers. A hot wallet is best for this as it provides the direct ownership and instant access you need to operate. But it comes with a significantly higher risk of theft as you will manage your own keys which are a target for hackers.
A BitGo hot wallet protected by Coincover Theft Cover gives you permanent protection and a guaranteed pay out if your cryptocurrency is stolen. You are free to continue using your wallet as you would normally and are not required to notify us of transfers. There are no hidden charges and no excess so you will receive a full pay out so long as it does not exceed your cover limit.
An insured hot wallet is a safe low cost alternative to custody
Using just a BitGo hot wallet protected by Coincover is also becoming an increasingly popular alternative to custodial storage for businesses seeking to reduce risk of the theft but whose cryptocurrency operations are not sufficiently large to require cold storage or simply want to keep control of their funds.
Up Next Part 5: Coincover's approach to Cryptocurrency Insurance