Companies and individuals are riding the ups and downs of cryptocurrency and NFTs—with losses and swings in the billions of dollars—but digital assets are not going away.

Abstract: The risk of loss in certain categories may be mitigated by insurance, whether provided by tailored policies and/or under policies designed specifically for digital asset owners. Those with exposure to the digital asset sector should be attuned to the emerging marketplace for such insurance products. While it is early days for NFT-specific coverage, the rise of cryptocurrency has created a substantial marketplace for crypto coverage. Insurers are becoming increasingly able to model and assess risk, so more products are coming to market. That said, digital asset holders need to be able to select coverage that best suits their needs. In this article, the authors discuss the history and status of coverage for digital assets to assist readers in exploring how they might use insurance to mitigate risk in this emerging and rocky sector of global finance.

“Over the course of a decade, the marketplace for cryptocurrency has increased from zero to an estimated $250 billion. However, only $6 billion in insurance coverage is currently available. It would be a gross understatement to say that there is a truly remarkable imbalance between market value and insurance capacity.”

Introduction

Crypto markets are experiencing the greatest crash in their history to date.  The value of a Bitcoin (BTC) has plummeted 70% from its peak and Ethereum (ETH) has fallen 77%.  Since last November, the value of cryptocurrency tokens has lost $2 billion in value. As noted financial publication Barron’s put it: “Crypto is having a ‘Lehman moment,’ a shattering of confidence triggered by plunging asset prices, liquidity freezing up, and billions of dollars wiped out in a few scary weeks.” Cryptocurrency companies are halting withdrawals and transfers, platforms are seizing up, and regulators are circling.

Nor has the devastation been limited to the coins themselves.  Non-fungible token (NFT) sales have reduced by 90% since September 2021.  The New York Times reported that Opensea.io (OpenSea) an NFT marketplace that receives 2.5% share of the proceeds for each NFT sale, has been plagued by “a surge of plagiarism, as sellers convert traditional artwork into NFTs and then list the images for sale without compensating the original creator.”  For example, DeviantArt, an artist collective that scans OpenSea for copyright infringement of the work of its artists, found 290,000 instances of unauthorized NFTs copying its artists’ works. While infringing listings can be deleted in response to take down requests filed by the artist, buyers of counterfeit NFTs are rarely given a refund.

Against this backdrop, the issue of whether there may be claims associated with cryptocurrency and NFTs is far from a theoretical or esoteric thought exercise.  It is very real.  And when there are claims, businesses and investors doubtless will look to their insurers.

A business or home is devastated by a wildfire.  Property insurance is available up to limits.  A home is broken into, and art and jewelry are stolen.  Crime/specie insurance is available.

But what about new age assets?  What about cryptocurrency?  What about NFTs?  These obviously are not immune from theft by hackers.  In 2021, hackers stole at least $3.2 billion in cryptocurrency with schemes short of outright theft accounting for another $7.8 billion. In the first four months of 2022, NFT hacks accounted for $52 million in losses, an almost eight-fold increase from 2021.

There typically is a significant time lag between the development of a product and the availability of product-specific insurance.  This general proposition applies with equal force here.  Over the course of a decade, the marketplace for cryptocurrency has increased from zero to an estimated $250 billion.  However, only $6 billion in insurance coverage is currently available.  It would be a gross understatement to say that there is a truly remarkable imbalance between market value and insurance capacity.

Although NFTs have been around for the better part of a decade, it was only during the last two years that the marketplace has grown to upwards of $41 billion. In addition to its newness, NFTs pose additional risks for insurers, including questions of ownership, authenticity and the valuation of a truly “unique” asset.  Consequently, availability of insurance coverage for NFTs is even further behind.

Given the rapid rate at which the digital asset field is developing, and claims are emerging, and the insurance industry’s attempts to specifically address coverage for these losses and claims, anything written on this topic will, at least in part, be outdated by the time it is published.  The objective of this article is to educate the reader on the history and status of the field, enabling them to ask the questions they need to ask, and to procure the coverage they need if available now or in coming months.