Multiple market players claimed insurers are refusing or restricting coverage to clients who have exposure to the insolvent crypto exchange FTX, rendering traders and exchanges of digital currencies uninsured for any damages from hacks, theft, or legal actions.
Due to the lack of market regulation and the unstable pricing of Bitcoin and other cryptocurrencies, insurers were previously hesitant to underwrite assets and directors and officers (D&O) coverage insurance for cryptocurrency enterprises.
Now, worries have increased as a result of FTX’s collapse last month.
Specialists in the Bermuda insurance market and the Lloyd’s of London (SOLYD.UL) market are demanding more openness from cryptocurrency companies on their exposure to FTX. Additionally, the insurers are recommending extensive policy exclusions for any allegations made about by the company’s demise.
Kyle Nichols, the president of broker Hugh Wood Canada Ltd. said insurers are requesting clients to answer questions about whether they have assets listed on the exchange or invested in FTX.
Ben Davis, head for digital assets at Lloyd’s of London broker Superscript, claimed clients who transacted with FTX are required to complete a questionnaire outlining the percentage of their exposure.
He added that there will either be a drop in coverage or an exclusion that restricts coverage for any claims coming out of a client’s funds housed on FTX if they have 40% of their entire assets at FTX that they cannot access.
Five insurance sources revealed the insurance plans that cover the security of digital assets and the personal liability of directors and executives of companies that deal in cryptocurrency, have exclusions that refuse payment for any claims resulting from the FTX bankruptcy. A broker also tacked on that a few insurers have been pressing for plans to include a broad exclusion for everything connected to FTX.
Exclusions may serve as a safeguard for insurers and will make obtaining coverage even more challenging for businesses, according to insurers and brokers.
Even more stringent guidelines are used by Bermuda-based cryptocurrency insurance Relm, which has previously given coverage to organisations connected to FTX.
Joe Ziolkowski, the co-founder of Relm, said it’s doubtful that everyone would cease offering the coverage if a crypto restriction or a regulatory exclusion were included.
Given the difficulties facing the exchange’s management right now, one of the most urgent considerations is whether insurance carriers will cover D&O insurance at other businesses that have done business with FTX, Ziolkowski added.
Sam Bankman-Fried, the former CEO of FTX, is accused by U.S. prosecutors of engaging in a scheme to defraud the company’s clients by stealing their deposits and using them to cover costs and debts as well as invest on behalf of his cryptocurrency hedge fund, Alameda Research LLC.
Bankman-attorney Fried’s stated on Tuesday that his client is examining all of his legal alternatives.
Legal fees are typically covered by D&O plans, however, this is not always the case when fraud is involved.
Due to client confidentiality, insurance providers declined to identify actual or potential clients who might be impacted by policy changes.
Both Genesis, a cryptocurrency lender, and Binance, a cryptocurrency exchange, have financial exposure to FTX. Neither company responded to emails requesting comment.
A D&O insurance policyholder’s coverage may now be confined to tens of millions of dollars for the remainder of the market Ziolkowski warned. While the least risky segments of the crypto market, like businesses that own cold wallets designed to store assets on platforms not linked to the internet, may get a shield for up to $1 billion, Ziolkowski said.
Insurance rates will probably increase as a result of the FTX collapse, particularly in the US. D&O market, according to insurers. Due to projected dangers and a lack of information regarding prior insurance losses involving cryptocurrencies, prices are already high.
For a dealer of digital assets, a typical crime bond would cost $30,000 to about $40,000 for every $1 million in coverage in order to safeguard against losses brought on by criminal activity.
According to Hugh Wood Canada’s Nichols, this contrasts with a standard securities trader’s expense of around $5,000 per $1 million.