by DEC 19 (Reuters) – Insurers are refusing or limiting coverage for customers exposed to bankrupt crypto exchange FTX, leaving digital currency traders and exchanges uninsured against losses from hacks, theft or lawsuits, several market participants have said.
Due to the low level of market regulation and volatile prices of bitcoin and other cryptocurrencies, insurers have already been reluctant to underwrite insurance policies protecting assets and directors and officers (D&O) for crypto companies.
Now, the collapse of FTX over the past month has heightened concerns.
Specialists in the Lloyd’s of London (SOLYD.UL) and Bermuda insurance markets are calling for more transparency from crypto companies about their exposure to FTX. Insurers are also proposing sweeping policy exclusions for any claims arising from the company’s collapse.
Kyle Nichols, president of broker Hugh Wood Canada Ltd, said insurers require customers to fill out a questionnaire asking if they invest in FTX or have any assets on the exchange.
Lloyd’s of London broker Superscript is giving clients who have had dealings with FTX a mandatory questionnaire to outline their percentage of engagement, said Ben Davis, head of digital assets at Superscript.
“Let’s say the client has 40% of their total assets held on FTX that they don’t have access to, that will either be a drop or we will place an exclusion limiting coverage for any claims from their funds held on FTX”, he said.
The exclusions, which deny payouts for claims arising from the FTX bankruptcy, are found in insurance policies that cover digital asset protection and personal liability for directors and officers of companies that trade in crypto, five insurance sources told Reuters. A few insurers have been pushing for a broad policy waiver for anything FTX-related, a broker said.
Exclusions can act as a resiliency for insurers and will make it even harder for companies seeking coverage, insurers and brokers said.
Bermuda-based crypto insurer Relm, which has previously insured FTX-affiliated companies, is taking an even stricter approach.
“If we need to include a crypto ban or a regulatory ban, we simply won’t provide the coverage,” said Relm co-founder Joe Ziolkowski.
D&O QUESTION
One of the most pressing questions now is whether insurers will cover D&O policies at other companies that have had dealings with FTX given the issues the exchange’s leadership is facing, Ziolkowski said.
US prosecutors say former FTX CEO Sam Bankman-Fried was involved in a scheme to defraud FTX’s clients by using their deposits to pay expenses, debt and investments on behalf of his crypto hedge fund Alameda Research LLC.
An attorney for Bankman-Fried said Tuesday his client is considering all of his legal options.
D&O policies, which serve to cover legal costs, do not always pay in the event of fraud.
Insurance sources would not name their customers or potential customers who may be affected by policy changes, citing confidentiality. Crypto firms with financial exposure to FTX include Binance, a crypto exchange, and Genesis, a crypto lender, neither of which responded to emails seeking comment.
While the least risky parts of the crypto market, such as For example, while companies owning cold wallets that store assets on platforms that aren’t connected to the internet may receive coverage of up to $1 billion, a D&O policyholder’s coverage may now be limited to tens of millions dollars for the rest of the market, Tsiolkovsky said.
The FTX collapse is also likely to lead to an increase in insurance rates, particularly in the US D&O market, insurers said. Rates are already high due to the perceived risks and lack of historical data on cryptocurrency insurance losses.
A typical criminal bail — used to protect against losses resulting from a criminal act — would cost a digital asset trader $30,000 to $40,000 per $1 million of coverage. That compares to a cost of about $5,000 per $1 million for a traditional broker, said Nichols of Hugh Wood Canada.
Reporting by Noor Zainab Hussain in Bengaluru and Carolyn Cohn in London; Edited by Lananh Nguyen and Anna Driver
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