The collapse of Bitcoin, Terra and Celsius raises questions about crypto insurance

The crypto industry is collapsing. Bitcoin prices are at its lowest level since 2020; a platform prohibits users from withdrawing funds and many of the largest crypto companies, including Coinbase and BlockFi, announced cuts. This disturbance reflects the economic turmoil that is spreading to the wider market, but also serves as a clear warning to ordinary people that, in general, crypto can be valuable one day and useless the next.

Although the companies that people use to buy and store cryptocurrency are in some ways similar to banks, these platforms do not have the deposit insurance that bank or investment accounts have. If the companies that operate these platforms fail, there is no guarantee that people will be able to restore the value of their cryptocurrencies. This lack of protection reflects the fact that regulators are still catching up with the crypto industry. It also serves as a reminder that while crypto platforms may seem secure – some are publicly traded companies – they operate in an industry that has almost no rules and few safety nets. Even the UST, the cryptocurrency “stablecoin”, which is supposed to track the value of the US dollar, crashed last month, gutting the equivalent of tens of billions of dollars.

“My sleep was severely disturbed, I lost 4 kilograms in a few days, I was extremely depressed,” said Yuri Popovich, a Kyiv-based web designer who transferred his family’s savings to the UST in the wake of the war in Ukraine. Recode. “Unfortunately, there is no legislation in our country to cover such types of losses.

Although investing in cryptocurrency remains incredibly risky around the world for many reasons, regular US bank accounts enjoy some protection offered by the Federal Deposit Insurance Corporation (FDIC). Founded during the Great Depression to stimulate confidence in the financial systemThe FDIC is designed to ensure that account holders reimburse at least some of their money case of bank failure. Banks finance the FDIC, which in turn insures bank accounts of up to $ 250,000.

Because crypto platforms are not technically banks and do not pay in the FDIC system, individual crypto accounts do not have this form of protection. Meanwhile, crypto investment accounts are usually not supported by the Securities Investors Protection Corporation, which insurance accounts managed by brokerage firms, e.g. fidelity or Avant-gardeup to $ 500,000 if the company goes bankrupt.

“Most people buy cryptocurrency to speculate, don’t they?” They see it as an investment asset, “said Lee Rainers, executive director of the Duke Law School’s Center for Global Financial Markets. “If you buy Apple stock, there’s really no insurance there either. The concept of insurance does not apply now. ”

The risky nature of cryptocurrencies has become a larger topic of discussion as several crypto companies show signs of staggering. Coinbase, one of the most popular cryptocurrencies in the world, said in last month’s revenue statement that consumers could theoretically lose access to their cryptocurrencies if the company went bankrupt. (Coinbase later tried to return the warning blog postand said that “there has never been a situation where clients’ funds can be confused with corporate assets.”)

Things have only gotten worse for the crypto industry lately. It is reported that after the collapse of the UST Securities and Exchange Commission investigation whether the company behind the Terraform Labs coin has violated securities law. And last week Celsius Network, a crypto platform that is not a real bank, but is said to offer high-yield cryptocurrency lendingsuddenly prohibit its users from withdrawing from the platform; the regulators of securities in several countries are now investigating this decision. Downtime can be extremely costly for crypto investors, as the value of a coin can change by hundreds or thousands of dollars in just a few hours. Against the background of all the disturbances, the price of bitcoin is about 20,000 dollars, a sharp drop from its peak in November of nearly $ 70,000.

“Currently, there is no easy way for clients to determine the nature and extent of their exposure to a cryptocurrency trading platform,” said Dan Auri, a law professor at Cornell. said Barron’s last month. “Customers must accept that the bankruptcy of the platform will expose them to significant delays in recovery, at the end of which they can only recover pennies from the dollar.”

But there are other risks. A crypto wallet can be hacked and once someone has stolen what is in it, this crypto can be amazing difficult to recover. Some people try to avoid this risk by protecting their cryptocurrencies with what is called “refrigerated storage“Which is like storing the keys that people use to access their crypto on a hard drive that isn’t connected to the Internet. This method comes with the same kind of risks as any other piece of physical property, and these risks are even more significant for companies that store many foreign cryptocurrencies in refrigerated storage, as well as for crypto mining operations that produce new cryptocurrencies. using warehouses full of powerful computers.

“You have an earthquake, a flood, a fire, lightning, wind, hail,” said Ben Davis, team leader at Superscript. insurance program which covers crypto and is registered as a broker in Lloyd’s insurance market. “If you have very, very expensive equipment in one place, you will want it insured.”

While some conventional insurance providers are slowly warm up to cover the crypto, there is also an emerging harvest of start-ups that focus specifically on crypto insurance. These include companies such as InsurAce, which covers crypto hacking losses, and Coincover, which offers NFT insuranceamong several other crypto-focused products that come with insurance.

Some people are already filing claims for cryptocurrency losses. An Ohio judge ruled in 2018 that bitcoin stolen from a person’s online account was legally owned – not money – and should therefore be covered by the man. homeowner’s insurance for its total value, which at the time was $ 16,000. After an explosion at a substation used by a bitcoin miner in upstate New York last month, the affected company, along with crypto miner Blockfusion, said it would file a claim for the income they have lost.

Recently, insurance ‘Dan Thomson says the company has paid more than $ 11 million to people who bought dispatch insurance for its UST, the stable coin designed by Terraform Labs (dispatch occurs when the value of the cryptocurrency no longer matches the fiat currency or another type of asset that is intended to be tracked). The company also restored some of his clients after hackers attacked a crypto platform called Elephant money in April.

Although insurance is becoming a bit more part of the crypto industry, the coverage is still patchwork. And even when a crypto platform buys insurance, there is no guarantee that individual crypto owners who use this company platform are completely protected. Coinbase, for example, he says that while certain security events are protected by his insurance, even if the company tries to keep people healthy, its plan may not fully cover someone’s losses. In general, most of the business in the world of cryptocurrency remains uninsured.

“It’s really, really, very little,” said Eihab Aedjaz, co-founder and CEO of Breach Insurance, an insurance company that focuses on crypto. “There is simply not enough insurance capacity in the market to ensure that even a small part of the total exposure is there.”

This highlights a major problem when it comes to regulating crypto: There is no strong consensus on what crypto is. Are Internet money, property, fraud, digital assets, security, a reasonable investment? And because there is no consensus on what a cryptocurrency is, it is difficult to come up with a good approach to insuring its value – or to understand whether it should be protected in the first place.

Regulators are still researching how to approach crypto. The SEC says at least some cryptocurrencies are securities, and earlier this year President Joe Biden ordered federal agencies to launch drafting new rules for the industry. A bipartisan bill by Sens. Kirstin Gilibrand (D-NY) and Cynthia Loomis (R-WY) aims to protect customers’ access to their cryptocurrency in case the crypto exchange they use goes bankrupt, among other proposals to regulate the industry. At least one MP, rep. Josh Gotheimer suggested that the government extend FDIC coverage to certain types of cryptocurrencies on stable coins, as long as they are provided by institutions that the government meets the requirements. The FDIC, the Federal Reserve and the Currency Controller’s Office have offer similar plans. However, not everyone thinks this is a great idea or makes sense for every type of cryptocurrency.

“If crypto is a purely speculative investment, then I don’t think it’s wise to put deposit insurance and government support behind these crypto assets,” said Hillary Allen, a law professor at American University. “Investors need to understand that what they are doing is not investing in a bank. What they are doing is gambling. “

Growing efforts to regulate the crypto industry are unlikely to end soon. Meanwhile, all the chaos in the crypto market is making more people think about the fate of their money. This may not be good news for crypto investors, but it is certainly good news if you are in the thriving crypto insurance business.

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