Major U.S. cryptocurrency exchange Coinbase has revealed that its customers’ cryptocurrency held in the exchange’s hot wallets is covered for a reported $255 million.
The details of this insurance coverage were disclosed by Coinbase’s VP of security Philip Martin in a blog post published on Tuesday, April 2.
The exchange reportedly holds around 2 percent of its customers’ assets in hot wallets while the rest (98 percent) are secured offline in cold storage, where exposure to third-party attacks like hacks is significantly minimized.
Lloyd’s of London
Martin notes in his blog post that the $255 million limit policy was placed by Aon, a Lloyd’s of London registered broker and “sourced from a global group of U.S. and U.K. insurance companies, including certain Lloyd’s of London syndicates.”
The Coinbase chief security officer did not, however, provide the names or such other details of the specific underwriters.
Lloyd’s of London, which continues to open up the insurance space for crypto and is highly regarded, isn’t your typical insurance company. It is, as Martin notes, a kind of insurance marketplace that brings together multiple underwriters who work in syndicates. Together, the syndicates pool resources and thus help in spreading the risk.
Apparently, Coinbase has had an insurance policy cover for funds in its hot wallets since November 2013, particularly to safeguard against what is viewed as the biggest risk facing customer assets- losses resulting from hacking.
Coinbase’s revelation comes less than a month since crypto security firm BitGo announced it would be offering an insurance cover of up to $100 million for assets in cold storage. BitGo also revealed that it would use Lloyd’s of London underwriters.
BitGo’s VP of Marketing Clarissa Horowitz noted that Coinbase’s move brings more transparency to the digital assets space, a fundamental step towards building trust within the industry.
Crime vs. specie insurance
Crypto insurance covers fall in two classes- that which covers the hot wallet and that which covers cold storage. Specifically, the two classes are provided by the crime and the specie insurance markets.
According to Martin, crime policies provide insurance to “value in transit,” which would in traditional markets, cover things like theft at ATMs or from armored vehicles. In the world of cryptocurrency, crime insurance covers losses occasioned by hacking, insider theft cases, or fraudulent crypto transfers.
In contrast, policies within the specie market cover what is known as “value at rest,” including things like fine art and precious metals stored in a vault.
In crypto, specie policies specifically provide cover against physical damage or the loss of client private keys stored in cold storage. Included here would be cases of employees misusing the data or stealing.
As such, there is a big difference between “value in transit” and “value at rest,” meaning that Specie policies would, for instance, not cover funds lost as a result of on-blockchain failures like vulnerability in smart contract Multisig implementations.
While suggesting that a lot still needs to be done to open up the crypto insurance space, Martin advises that it would be better to focus on assets held in hot wallets and not in cold storage, as the latter holds assets not exposed to much risk.
Notably, Martin suggests that to open the crypto insurance space further would need policies to be written, not just to exchanges or custodians as is now, but directly to those who own the cryptocurrencies.
“We need a world where the ultimate owners of cryptocurrency are able to directly insure their assets stored with trustworthy, well-reviewed, transparent service providers.”
The crypto insurance space has begun attracting some of the major insurers around the world, including companies like the XL Group, AIG, and Allianz.
Disclaimer: This is not investment advice. Cryptocurrencies are highly volatile assets and are very risky investments. Do your research and consult an investment professional before investing. Never invest more than you can afford to lose. Never borrow money to invest in cryptocurrencies.