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“Given such roaring adoption, it is not surprising that more cybercriminals are using cryptocurrencies,” the firm wrote in its analysis of the investigation. “But the fact that the increase was only 79%, almost an order of magnitude lower than the overall adoption, might be the biggest surprise of all.”
The burgeoning decentralized finance (DeFi) sector accounted for a large portion of cryptocurrency-related crime, which was primarily due to stolen funds and scams, including a relatively new type of fraud called “rug pulling,” where developers build what appears to be a legitimate cryptocurrency. projects before fleeing with investors’ money. The scam accounted for more than $2.8 billion, or 37% of total crypto crime revenue.
However, cryptocurrency theft grew even more, with around $3.2 billion in cryptocurrency stolen in 2021, a whopping 516% increase compared to the previous year. Of these, approximately $2.2 billion was taken from DeFi protocols.
But despite the report’s findings that “crime is becoming a smaller and smaller part of the cryptocurrency ecosystem,” Chainalysis noted that “$14 billion worth of illicit activity represents a significant problem.”
“Criminal abuse of cryptocurrency creates huge impediments to continued adoption, increases the likelihood that governments will impose restrictions, and worst of all, victimizes innocent people around the world,” the firm wrote.
Read more: Crypto insurance: how the market is expanding
While cryptocurrency has the potential to create massive opportunities in today’s financial system, it also brings new risks. But as the cryptocurrency insurance segment is still in its infancy, there is a huge coverage gap, especially for investors.
“Most insurance policies are designed for businesses and corporations, not private consumers,” cryptocurrency exchange platform Bybit explained in a guide on its website. “Crypto wallets and exchanges purchase insurance policies with coverage, designed to protect against cyber theft and security threats. Other types of coverage are still under development and may offer additional protection…However, these policies are not yet available for consumers to purchase.”
But considering the unpredictability of the cryptocurrency ecosystem, having insurance plays a critical role in keeping digital assets protected. Here are some of the most common questions investors ask about cryptocurrency hedging, along with answers from industry specialists.
Why is there a need for cryptocurrency insurance?
The value of cryptocurrencies has skyrocketed in recent years, leading to massive scams and thefts costing investors billions of dollars in losses, as reflected in the report by Chainalysis, which covers the activities of crypto crime in 2021.
But since peaking in November, the value of cryptocurrencies has plummeted, with the market crash wiping out as much as 40% of the value of most top-tier cryptocurrencies, reportedly by a total of over of $1 billion, in a span of just a few weeks. , demonstrating the volatility of the sector.
“Fear is the biggest factor driving bearish sentiment in the crypto market,” noted market research firm Analytics Insight. “As Terra crashed, crypto investors panicked and started selling other coins as well, ultimately crashing the cryptocurrency market. There are few cryptocurrencies that are barely hanging on the edge and might not survive this massive bear market. But now, the cryptocurrency market is showing some signs of recovery.”
Both cases show how important it is for cryptocurrency investors to have some form of protection.
Read more: Crypto in 401(k) Plans: Why Trustees Need to Be Cautious
How does cryptocurrency insurance work?
According to Bybit, crypto insurance is a type of policy designed to protect against losses associated with cyber security breaches.
“Most major cryptocurrency exchanges have at least some insurance to protect digital assets in their custody against loss from theft and other security breaches,” the firm explained. “Exchange insurance is designed to protect against losses incurred in covered security events. However, total losses can occasionally exceed insurance recoveries, leaving some investors unable to recover all of their investments.”
Because they are not legal tender, unlike the US dollar, cryptocurrencies are not backed by the government, which means they do not get protection against the loss of funds. In the US, the Federal Deposit Insurance Corporation (FDIC) generally provides up to $250,000 in coverage for each person per bank, covering checking, savings, and money market deposit accounts, and certificates deposit.
Deposits into brokerage accounts for the purpose of purchasing securities, meanwhile, are covered by the Securities Investor Protection Corporation (SIPC).
What does crypto insurance cover?
Crypto wallets and exchange purchase policies designed to protect them against theft and cybersecurity threats, according to Bybit. The firm added that other types of coverage are still under development and may have additional protection. These include DeFi insurance, which could offer protection against “loss of funds associated with a service provider shutdown, loss of private cryptographic keys, or similar catastrophes.”
However, the firm noted that these policies are not yet accessible to consumers.
read more: Crypto market ‘neglected’ by insurance
What does crypto coverage exclude?
Crypto insurance policies do not typically cover losses resulting from fluctuations in the market or if investors fall victim to a Ponzi scheme, costing them some or all of their investment, according to financial website Investopedia.
Insurance information website PolicyAdvice added that coverage may exclude “direct loss and damage to hardware and transfer of cryptocurrency to a third party” and “interruption or failure of the underlying blockchain of the asset.”
What are the challenges facing crypto insurance providers?
One of the biggest challenges keeping crypto insurance from going mainstream, according to experts, is regulatory uncertainty.
“While there has been a demand for cryptocurrency insurance to cover everything from deposits to theft, the main concern is underwriting risks,” explained consumer electronics news outlet CNET. “Major insurance companies do not feel they can accurately assess risk factors due to a lack of cohesive rules and regulations in the crypto insurance industry. While newer insurers are jumping in headfirst, others are simply dipping their toes in to test the temperature.”
Investopedia added that a lack of historical data and market unpredictability are dampening the appetite for crypto insurance.
“Bitcoin and cryptocurrencies present unique challenges for insurers,” the firm wrote. “Usually insurance premiums are based on historical data. Such data is absent for cryptocurrencies. Volatility in valuations, where triple-digit price changes are not uncommon, can also affect premiums because it reduces the total number of coins insured.”
Can investors buy personal cryptocurrency coverage?
According to CNET, Breach Insurance is currently the only company offering direct-to-consumer policies, and the insurer’s Crypto Shield product is the first regulated insurance for crypto investors.
Breach is licensed to provide crypto coverage to residents of 10 states, including its home state of Massachusetts, California, and New York, with plans to expand to more locations later this year. The policy covers 20 types of coins, including Bitcoin, Ethereum, and Dogecoin, within Coinbase, CoinList, Gemini, and Binance exchanges. Protects against theft and provides coverage from $2,000 to $1 million, with 5%, 10% and 15% deductible options.
Read more: Breach Places Industry’s First Crypto Insurance Policy
How do crypto exchanges and wallets protect investors?
According to Bybit, the level of protection that the average consumer can access from crypto exchanges and wallets largely depends on the services they use.
“For the most secure experience, the most basic level of security should include two-factor authentication (2FA) as standard,” the firm explained. “It is also advisable to use a cold wallet for most digital assets. Hot wallets are more convenient, but they are more accessible to hackers. Cold wallets are offline and usually have an air gap, which protects them well from those with bad intentions.”
Bybit added that most exchanges offer crypto insurance programs that, while not backed by the government, protect funds and compensate losses up to a specified amount if these exchanges are hacked.