Bitcoin, Terra and Celsius collapses raise questions about crypto insurance – Reuters News in France and abroad

The crypto industry is cratering. Bitcoin prices are at their lowest since 2020; one platform banned users from withdrawing funds, and many of the biggest crypto companies, including Coinbase and BlockFi, announced layoffs. This disruption reflects the economic turmoil rippling through the entire market, but also serves as a stern warning to ordinary people who, generally speaking, crypto can be valuable one day and worthless the next.

Although the companies people use to buy and store crypto are in some ways similar to banks, these platforms lack the deposit insurance that bank or investment accounts have. If the companies operating these platforms were to go bankrupt, there is no guarantee that people would be able to recover the value of their crypto. This lack of protection reflects the fact that regulators are still catching up with the crypto industry. It’s also a reminder that while crypto platforms may seem secure — some are publicly traded companies — they operate in an industry that has almost no rules and few safety nets. Even UST, a “stablecoin” cryptocurrency meant to track the value of the US dollar, crashed last month, gutting the equivalent of tens of billions of dollars.

“My sleep was badly disturbed, I lost 4 kilos in a few days, I was in an extremely depressed state,” said Yuri Popovich, a Kyiv-based web designer who transferred his family’s savings to the UST in the midst of the war in Ukraine. Recode. “Unfortunately, in our country, there is no legislation covering this type of loss. »

Although investing in crypto remains incredibly risky around the world for many reasons, regular US bank accounts have some protection offered by the Federal Deposit Insurance Corporation (FDIC). Founded during the Great Depression to build confidence in the financial system, the FDIC is designed to ensure that account holders will get at least some of their money back if a bank fails. Banks fund the FDIC, which in turn insures bank accounts up to $250,000.

Since crypto platforms are technically not banks and do not pay into the FDIC system, individual crypto accounts do not have this form of protection. Meanwhile, crypto investment accounts are generally not backed by the Securities Investor Protection Corporation, which insures accounts managed by brokerage firms, like Fidelity or Vanguard, for up to $500,000 if the company goes bankrupt. .

“Most people buy cryptocurrency to speculate, right? They see it as an asset to invest in,” said Lee Reiners, executive director of the Global Financial Market Center at Duke Law School. “If you’re buying Apple stock, there’s really no insurance either. The concept of insurance doesn’t really apply anymore.

The risky nature of crypto has become a bigger topic of discussion as several crypto companies show signs of weakness. Coinbase, one of the world’s most popular crypto exchanges, said in an earnings report last month that users could theoretically lose access to their crypto if the company goes bankrupt. (Coinbase later attempted to backtrack on the warning in a blog post and said there was “never a situation where customer funds could be confused with company assets.”)

Things have only gotten worse for the crypto industry lately. Following the UST crash, the Securities and Exchange Commission reportedly investigate whether the company behind the coin, Terraform Labs, violated securities law. And last week, Celsius Network, a crypto platform that is not a real bank but claims to offer high-yielding cryptocurrency loans, suddenly banned its users from withdrawing from the platform; securities regulators in several states are currently investigating the decision. Downtime can be extremely costly for crypto investors, as the value of a single coin can fluctuate by hundreds or thousands of dollars in just a few hours. Amidst all this disruption, bitcoin price is around $20,000, a sharp decline from its November high of nearly $70,000.

“At this time, there is no easy way for clients to determine the nature and extent of their exposure to the failure of a crypto-trading platform,” said Dan Awrey, a law professor at Cornell at Barron’s last month. “Clients should assume that a platform’s failure would expose them to significant recovery delays, at the end of which they could only recover pennies on the dollar. »

But there are also other risks. A crypto wallet can be hacked, and once someone steals what’s in it, that crypto can be incredibly difficult to recover. Some people try to avoid this risk by protecting their crypto with what’s called “cold storage,” which is like storing the keys people use to access their crypto on a hard drive that isn’t connected. to internet. This method carries the same kind of risks as any other physical asset, and these risks are even greater for companies that store many other people’s crypto in cold storage, and for crypto mining operations that produce new cryptocurrencies using warehouses. full of powerful computers.

“You have an earthquake, flood, fire, lightning, wind, hail,” said Ben Davis, team lead at Superscript, an insurance program that covers crypto and is registered as a as a broker in the Lloyd’s insurance market. “If you have a lot of very expensive equipment in one place, you’ll want it insured. »

While some conventional insurance providers are slowly gearing up to cover crypto, there is also a new breed of startups that are focusing specifically on crypto insurance. These include companies like InsurAce, which covers losses from crypto hacks, and Coincover, which offers NFT insurance, among several other crypto-focused products that come with insurance.

Some people are already filing claims for crypto losses. An Ohio judge ruled in 2018 that bitcoin stolen from a man’s online account was legally property — not cash — and therefore had to be covered by the man’s home insurance for its full value, which at the time was $16,000. After an explosion at a substation used by a bitcoin miner in upstate New York last month, an affected company, as well as crypto miner, Blockfusion, said they would file a claim for the income they have lost.

More recently, InsurAce’s Dan Thomson said the company paid out over $11 million to people who purchased “depegging” insurance for their UST, the Terraform Labs-designed stablecoin (depegging occurs when the value of a cryptocurrency no longer matches the fiat currency, or other type of asset, that it is designed to track). The company also refunded some of its customers after hackers attacked a crypto platform called Elephant Money in April.

Although insurance is becoming a slightly larger part of the crypto industry, coverage is still patchy. And even when a crypto platform purchases insurance, there is no guarantee that individual crypto holders using that company’s platform are fully protected. Coinbase, for example, claims that while certain security events are protected by its insurance, even if the company tries to make people whole, its plan may not fully cover someone’s losses. Overall, most activity in the crypto world remains uninsured.

“It’s really, really, really small,” said Eyhab Aejaz, co-founder and CEO of Breach Insurance, an insurance company that focuses on crypto. “There just isn’t enough insurance capacity in the market to ensure that even a small fraction of total exposure is out there. »

This highlights a major problem with crypto regulation: there is no strong consensus on what crypto is. Is it internet money, property, scam, digital asset, security, reasonable investment? And because there’s no agreement on what crypto is, it’s hard to come up with a good approach to assuring its value — or determining whether it should even be protected in the first place.

Regulators are still considering how to approach crypto. The SEC has argued that at least some crypto products are securities, and earlier this year Chairman Joe Biden ordered federal agencies to begin drafting new rules for the industry. A bipartisan bill from the Sens. Kirstin Gillibrand (D-NY) and Cynthia Lummis (R-WY) aim to protect customers’ access to their cryptocurrency in the event the crypto exchange they use goes bankrupt, among other regulatory proposals. ‘industry . At least one lawmaker, Representative Josh Gottheimer, has proposed that the government expand FDIC coverage to certain types of stablecoins, provided they are provided by government-qualified institutions. The FDIC, Federal Reserve and Office of the Comptroller of the Currency have suggested similar plans. Still, not everyone thinks this is a good idea or makes sense for every type of crypto.

“If crypto is an entirely speculative investment, then I think it’s unwise to put deposit insurance and government support behind these crypto assets,” said American University law professor Hilary Allen. “Investors need to understand that what they are doing is not putting money in a bank. What they do is play.

The growing effort to regulate the crypto industry is unlikely to be over anytime soon. In the meantime, all the chaos in the crypto market is making more people think about the fate of their money. This may not be good news for crypto investors, but it is certainly good news if you are in the booming crypto insurance industry.

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Bitcoin, Terra and Celsius collapses raise questions about crypto insurance – Reuters News in France and abroad

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