As adoption of digital assets accelerates, the need for comprehensive insurance solutions grows. Understanding the risks and innovative solutions emerging in this space is crucial for investors and operators– as is scalability of proper coverage limits.
Market Volatility and Long Term Appreciation
With the advent of institutional adoption, Bitcoin and other digital assets are proving to be quite the boon for TradFi products such as Spot ETFs. Global insurance and reinsurance capacities and appetites for insuring the custodied assets is the Achilles heel for custodians to maintain compliance with jurisdictional rules and regulations, as well as giving assurances to their clients. Insurance companies do not have sufficient risk-based capital to meet the growing demand. If Bitcoin appreciates 5x-10x against fiat currencies in the next 5-10 years, the insufficiency of fiat insurance is exacerbated, because insurance and reinsurance balance sheets are not growing by a factor of 5x-10x, nor are these risk based balance sheets being 100% allocated to a single class of risk like digital assets. In reality, the allocation to address the crypto class of risk is closer to 10% of the risk based balance sheet. In order for fiat insurance to scale with digital asset risks, these fiat denominated risk based balance sheets of insurance and reinsurance companies need to appreciate by a factor of 50x-100x. Long term, this makes fiat insurance even more insignificant as a risk transfer solution, further enhancing the need for a crypto denominated option.
Crypto Education for Insurers
Short term, we need insurance companies to lean in and take a proactive approach to educating themselves on the perils and vectors of risk that exchanges and custodians face, as well as having a deeper understanding of the operations, economics, and technology of the insureds in the digital asset industry. If insurance companies have an increased basis of knowledge, their appetites for insuring more digital assets should naturally increase to better address the needs of this industry.
Emerging Trends
Meaningful regulation can further encourage insurance companies to participate in a bigger way and narrow the scope of the insurable risk, making the process of underwriting less daunting. Jurisdictions such as Dubai, UAE, Hong Kong, Singapore, the EU, and the UK are taking the proper steps to guide market participants to know what it means to be compliant, and this shows the insurance companies– and the insureds– the targets that must be hit to properly protect institutions and consumers.
Conclusion
There are three main pillars to any mature industry, and those are: Capital, Regulation, and Insurance. The Digital Asset industry is experiencing a sort of renaissance when it comes to Capital through institutional adoption and Spot ETFs. Regulations are still lagging, especially in the USA, but progress is being made in other jurisdictions, and it is encouraging to see. Insurance continues to be the slow-moving train that has yet to really leave the station, and we at Evertas are seeking to change this for the better of the digital asset industry we serve. If we can drive more scalable risk transfer solutions to market then consumers and institutions have an avenue to de-risk themselves in a maturing asset class. This should entice more capital investment into the industry which would further signal to regulators to construct frameworks of compliance conducive to innovation and consumer protection. As such, we at Evertas view insurance as a bridge to adoption for the global economy.