If the one and only person who holds the digital key to unlock $190 million worth of cryptocurrency suddenly dies and no one can recover it, was there really $190 million worth of crypto lost?
That’s precisely the type of scenario that has led to the development of new policy lines in the cryptocurrency insurance market. Carriers are designing policies to address issues such as:
- What happens when private keys are lost or stolen?
- Who is responsible for blockchain failures?
- What about theft during transfer or hacking?
- Is coverage for cold storage losses the same as hot wallet exposure?
These fundamental questions of value and liability are the ones financial forensics experts will be called upon to answer as insurance companies look to collect premiums for cryptocurrency and institutional investors hunger for a more secure version of digital currency.
The State of Cryptocurrency Insurance
The insurance scene around cryptocurrency is rapidly evolving. Philip Martin, Chief Information Security Officer (CISO) at Coinbase, recently wrote a brilliant summary of the insurance market. Some of the key points include:
Crypto Insurance is Coming Around
Just as the traditional banking world has FDIC insurance, cryptocurrency customers deserve a similar level of protection for their crypto holdings, Martin contends. Some companies, like Coinbase, have had insurance policies covering cryptocurrency in place since 2013. The coverage tends to be sourced from a global group of top-tier insurance providers to spread the risk in this emerging market. This structure allows insurers to build a diversified risk portfolio and avoid any one loss from wiping out their entire business.
Martin argues that while the number of insurers who understand the risks of cryptocurrency has increased considerably over the past few years, there is still insufficient capacity to meet the growing demand. More players are needed in this market.
Policies are Evolving
The two main classes of insurance in cryptocurrency are the Crime and Specie marketplaces. Specie policies tend to focus on physical damage or loss of private keys in cold storage (i.e., the insuring value “at rest”). They don’t typically cover specific blockchain failures or hacking (i.e., the insuring value “in transit”).
Crime policies tend to focus on hot wallet losses due to hacking, insider theft, or fraudulent transfer, in addition to loss of private key data in cold storage. Because the former incidents happen in transit, coverage for hot wallet exposures is significantly more expensive than for cold storage alone.
Current policies are usually written to exchanges or custodians, not directly to the owners of cryptocurrency. In the future, Martin expresses a desire to see coverage where the ultimate owners of cryptocurrency are able to directly insure their stored assets with trustworthy, transparent service providers.
Another policy enhancement, he contends, will be finding methods for keeping pace with asset valuation changes. Right now policies are denominated in fiat, but the assets are in crypto. This means that when markets are performing favorably, it can be challenging for companies looking to increase insurance policy limits at the same pace as their asset prices are moving. Insurers need to hold digital assets in order to offer policy limits denominated in cryptocurrency to avoid differences in valuation.
How Much Coverage Is Enough?
Martin recommends companies focus on insurance for value “in flight,” meaning that exchanges and wallets should have sufficient crime coverage to fully cover their hot wallets.
He says custodians should have enough crime insurance to cover normal outbound customer transaction sizes or enough to cover whatever assets are programmatically accessible if they’re not using cold storage.
Financial Forensics Carving Out its Niche in Crypto
Insurance carriers are acting on the opportunities that exist to build industry-leading cryptocurrency programs. But, given the complexity of this emerging industry, they are also recognizing that partnering with a qualified forensics team just makes good business sense.
With so many unknowns in this developing market segment, insurance providers will need specially-qualified financial forensics experts to investigate the claims that will inevitably arise. Forensic accountants are uniquely positioned to quantify losses and present the strongest possible case.
They may also act on behalf of plaintiffs or in class action suits, where their purpose to objectively document a valuation of financial harm. This requires them to mine numerous data sources to establish injury, for example, determining the value of the assets on the exchange at a specific point in time.
Financial forensics professionals analyze volumes of data – from blockchain transactions to internal controls to security measures — to uncover key, and often minute, details that will support their case.
Forensic accountants can work with cryptocurrency market on the following types of issues:
- Insurance claims accounting
- Cyber loss
- Investigations
- Valuation of damages
- Fraud and corruption
- Litigation support
- Expert witness testimony
In any of these scenarios, the forensic accountant can also provide litigation support, ranging from reports and documentation to expert witness testimony. In each case, the goal is to transform complex financial information into clear, fact-based evidence.
For guidance in addressing claims related to cryptocurrency, contact one of our many highly-trained forensics accountants.