By Noor Zainab Hussain and Carolyn Cohn
April 1 (Reuters) - If Elon Musk's Tesla wanted to insure
all of its recent $1.5 billion bitcoin investment against the
myriad of pitfalls it could encounter, like hacks, theft and
fraud, it would be out of luck.
Insurers have yet to catch up with the growing acceptance of
cryptocurrencies as an investment and in commerce: Musk said
last month Tesla's customers can now use bitcoin as
payment.
Scant regulation and volatile prices of bitcoin and other
cryptocurrencies make many insurers reluctant to underwrite the
risks, despite booming demand for protection of digital assets
and for personal liabilities of directors and executives of
companies that deal with cryptocurrencies.
Insurers and brokers estimate that of the few that provide
such insurance, none can offer coverage beyond $750 million for
any client.
Tesla did not respond to a Reuters request for comment.
The risks are considerable, with U.S.-based cyber security
firm CipherTrace estimating reported losses from theft, hacks,
and fraud totalling $1.9 billion in 2020.
"Insurers have only a finite capacity that they can write in
this space so it really is a case of getting in quickly," said
Ben Davis, lead for emerging technology and international
insurance with Superscript, a Lloyd's of London
broker with cryptocurrency clients.
But while both crime and demand for protection have tracked
cybercurrencies' meteoric rise, underwriting such risks remains
a niche business offered by specialist insurers in the Lloyd's
market and in Bermuda. Insurers who spoke to Reuters declined to
be named while discussing such a sensitive business area.
The high risk of hacking means smaller companies seeking
protection for their 'hot wallets' - digital assets stored
online - can typically get just about $10 million covered, with
the largest limits rarely exceeding the $100-200 million range,
insurers and brokers said.
DEMAND RISING FAST
Legal ambiguity surrounding the assets, with top regulators
from across the world calling for global rules for
cryptocurrencies, also acts as a deterrent for insurers.
Cryptocurrencies have struggled to win the trust of
mainstream investors and the general public due to their
speculative nature and potential for money laundering.
Insurance for directors and executives of cryptocurrency
companies, such as exchanges or custodians seeking to protect
their personal assets are also in short supply, brokers and
insurers said.
A potential large drop in the value of cryptocurrencies
could trigger lawsuits from investors, which in turn could leave
the insurer on the hook if the suit affected personal assets of
a firm's executives.
"Insurers get concerned because when there's volatility they
end up holding the bag," Davis said.
Davis added that Superscript has to put in "a lot of work"
to get directors and officers cover for clients.
Brokers say they see growing demand they just cannot match
with sufficient supply.
Jacqueline Quintal, U.S. digital asset leader at Marsh, the
world's biggest insurance broker, said she was fielding calls
from companies seeking protection for their assets, or
individuals running them, a couple of times a week, compared
with once every other week about six months ago.
"Just a huge rush to buy insurance. Period," she said.
Superscript's Davis said demand has doubled, if not tripled
since January over the same time last year.
Many custodians and cryptocurrency exchanges are also
looking to increase the limits in their existing policies as the
value of cryptocurrencies has risen, insurers and brokers said.
HEADS IN THE SAND
And just as insurers slowly warm to the new business
potential as deep-pocketed mainstream financial institutions
increasingly embrace cryptocurrencies, they face a fresh
challenge in the form of non-fungible tokens (NFTs).
These digital assets, including images, videos, audio or
even individual tweets, get authenticated by blockchain, which
certifies their originality and ownership, creating a market for
art and other collectibles that exists only in digital form.
Insurers face the difficulty of how to price policies and
assess how the value of digital art changes over time when there
are no available benchmarks yet, a leading London insurer who
declined to be named, said.
The establishment of a robust secondary marketplace could
help create capacity to insure these assets, the person said.
Many find the concept of 'minting' NTFs - to make them part
of a blockchain - and the prices that can reach millions of
dollars, perplexing, but Davis said it would be a mistake for
insurers to dismiss this new market.
"More companies are going to start tokenizing parts of their
business. And if you just say, well, we're not covering it,
because it's represented as a token, it doesn't make any logical
sense," he said.
"They can't just bury their heads in the sand and hope that
it all goes away, because it's not and it is here to stay."
(Reporting by Noor Zainab Hussain in Bengaluru, Carolyn Cohn in
London and Suzanne Barlyn in Washington Crossing; Editing by
Tomasz Janowski and Elaine Hardcastle)