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Can Crypto Insurance Become The First Step Towards Industry Regulation?

Key Takeaways

  • Crypto insurance has been one of those green flags for the customers that assured that their funds are safe with the project.

  • Crypto insurance could be of different natures depending upon the total coverage that it provides in case of its need

  • Integrating FDIC into cryptocurrencies would mean that the projects would have to compromise on consumer privacy and decentralization. 

  • The Mightiest of insurance giants is not entering the crypto sphere because of market volatility, lack of awareness, and the pseudonymous nature of blockchain. 


21 Nov 2022 By : Sudeep Saxena
Southeast Asia’s Lar


One of the key elements in cryptocurrency investments is investors’ trust in the project. The trust built around the project not only signifies its value proposition in the market but also indicates its chances of success amidst massive competition. However, building this user trust is not easy and different aspects of the projects contribute to this element. 

Crypto insurance has been one of those green flags for the customers that assured that their funds are safe with the project. There are hundreds of different reasons behind the fact that insurance agencies are one of the biggest gatekeepers in the traditional finance industry but do these insurances work for cryptocurrencies

In this CoinGabbar blog, we are going to talk about whether crypto insurance is effective in safeguarding investors’ money and could they become the first standard for an industry that is in a dire need of regulatory authorities. 

What is Crypto Insurance?

According to research done by Chainanalysis, crimes in the crypto industry have reached an all-time high. The uncertainties and volatility of crypto projects are also well-known in the space, these scenarios could create immense havoc for investors if any of the loopholes are exploited. To safeguard the interest of investors and their hard-earned money, crypto insurance is adopted by projects, providing them with a cover against multiple forms of crises that a financial organization can undergo.

Crypto insurance could be of different natures depending upon the total coverage that it provides in case of its need. However, insurance companies that provide cover for cryptocurrencies and other blockchain-based assets are rare.

The Insurance Fiasco: A Brief History of Insured Cryptocurrencies

Traditional investors are lucky enough to get covered through multiple insurance policies that are made mandatory by the government. But this is not the same for crypto investors as their investments are not secured by any form of insurance from the government. Even though multiple claims are made by crypto projects that their funds are assured by Federal Deposit Insurance Corporation (FDIC), however, those end up being nothing more than mere claims.

Getting insurance for a crypto project is not as easy as taking individual insurance policies. Crypto projects can only get their insurance policies approved only after giving proof of adequate liquidity and strong management structures. There have been talks about speculations about whether should cryptocurrencies be covered under the FDIC to provide a layer of consumer security but the roadblocks in implementing these are more than we can expect. Integrating FDIC into cryptocurrencies would mean that the projects would have to compromise on consumer privacy and decentralization. 

Chasing FDIC insurance could be counterproductive as it might not be able to suffice even the slightest of setbacks from the industry. Compromising decentralization for the insurance from a government entity whose funds are 99% lower than their insurance exposure does not make sense. However, the funds could be more secure if more private players enter the industry and provide holistic coverage to different projects after analyzing their respective fundamentals. 

Can Crypto Insurance Become the First Regulator?

As we discussed earlier, getting cryptocurrencies is not easy as insurers are bound to cover projects that come with solid fundamentals, clean books, adequate liquidity, and a vision to grow in the times to come. These are some of the things that angel investors look at the project before investing and their selections are trusted in the market because of their experience. 

However, venture capitalists could never become the regulators in cryptocurrencies as they are bound to exit the venture as soon as their expected profits are achieved. On the other hand, if crypto insurances become mainstream, they would have to ensure that insurance operations are not loss-making for them. To make sure, detailed and regular audits of crypto projects are to be conducted by their experts on the basis of which insurers are going to issue the policies.

If this standard is achieved, crypto projects could aim to meet the norms of adequate liquidity, high security, clean accounts, and a strong vision. Getting verified by the crypto insurers could become the mark of safety for investors. Directly or indirectly, this will result in the elimination of those crypto projects that lack these fundamentals and investors picking up only verified projects.

These crypto insurance policies could end up becoming the first form of a regulator that the industry is searching for a long time. Cryptocurrencies need a form of regulations that are not too controlling to take away the cause of decentralization and not too weak to even cover the retail investors. Crypto insurance policies can strike this balance for the industry. 

Difficulties in Insuring Crypto Operations

While looking at the other side of the picture, even the mightiest of insurance giants are not entering the crypto sphere. And there are substantial reasons behind this hesitation. In this segment, we are going to discuss some of the difficulties that might come with insuring crypto operations. 

Lack of Historical Metrics

Traditional investment options come with a history of hundreds of years and that backs up their credibility as safe investment tools. While cryptocurrencies and their market are relatively new and do not have adequate metrics to make accurate estimates. This lack of data makes it difficult for insurance companies to understand the capabilities of crypto as an organization and that becomes a hurdle in developing trust. 

Pseudonymous Nature of Blockchain Technology

Cryptocurrencies are based on blockchain technology and it was created to respect the privacy of users and validators while taking back control from central authorities. This translates into the fact that any third-party, retrieving user data from centralized blockchain players and utilizing it to make their investment decision, is against the moral proposition of blockchain technology. 

Market Volatility

The cryptocurrency market is extremely unpredictable and there is no method to know in which direction it will go in the next few days. This uncertainty is something that is not welcoming the organized finance players to strengthen their feet within the ecosystem. However, the market volatility is not expected to leave the market anytime soon.

Lack of Awareness

The more people know about a subject, the more chances it has to become mainstream but information about crypto in the masses is severely inadequate. Cryptocurrencies and related products are known only to a fraction of the global population. This lack of education and awareness is another hurdle in the mass adoption of blockchain tech.

Conclusion

Cryptocurrencies require a clear form of regulation from someone that can generate trust among the masses that cryptocurrencies are here to stay. From making crypto a common mode of transaction to reducing market volatility, the need for third-party regulators can be felt everywhere. 

The insurance industry could play the role of regulator and become the standard for safety and security for blockchain projects. However, apart from a few players such as Lloyd’s of London and IBM, no other companies have shown their interest in offering viable crypto insurance policies. With time, crypto insurance is going to become the norm of the industry but until then we have to ensure that we are investing in crypto projects only after adequate research. 

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