Daily Management Review

With Rising Risk Of Contagion, Insurers Avoid FTX-Linked Cryptocurrency Companies


With Rising Risk Of Contagion, Insurers Avoid FTX-Linked Cryptocurrency Companies
According to several market participants, insurers are refusing or restricting coverage to clients who have exposure to the insolvent crypto exchange FTX, leaving traders and exchanges of digital currencies uninsured for any losses from hacks, theft, or legal actions. Due to the lack of market regulation and the unstable prices of Bitcoin and other cryptocurrencies, insurers were already hesitant to underwrite asset and directors and officers (D&O) protection policies for cryptocurrency companies.
Now, worries have increased as a result of FTX's collapse last month.
Specialists in the Bermuda and Lloyd's of London insurance markets are demanding more openness from cryptocurrency companies regarding their exposure to FTX. Additionally, the insurers are recommending extensive policy exclusions for any claims brought about by the company's demise.
According to Kyle Nichols, president of broker Hugh Wood Canada Ltd., insurers are requesting clients to answer questions about whether they have assets listed on the exchange or invested in FTX.
According to Ben Davis, lead for digital assets at Lloyd's of London broker Superscript, clients who dealt with FTX are required to complete a questionnaire outlining the percentage of their exposure.
"Let's say the client has 40% of their total assets at FTX that they can't access, that is either going to be a decline or we're going to put on an exclusion that limits cover for any claims arising out of their funds held on FTX," he said.
According to five insurance sources, the insurance policies that cover the protection of digital assets and the personal liabilities of directors and officers of companies that deal in cryptocurrencies contain exclusions that deny payment for any claims resulting from the FTX bankruptcy. According to a broker, a few insurers have been pushing for policies to include a broad exclusion for anything connected to FTX.
Exclusions may serve as a failsafe for insurers and will make obtaining coverage even more challenging for businesses, according to insurers and brokers.
Even more stringent guidelines are used by Bermuda-based cryptocurrency insurer Relm, which has previously given coverage to organizations connected to FTX.
"If we have to include a crypto exclusion or a regulatory exclusion, we're just not going to offer the coverage," said Relm co-founder Joe Ziolkowski.
Given the difficulties facing the exchange's leadership, one of the most urgent questions right now is whether insurance companies will cover D&O policies at other businesses that did business with FTX, Ziolkowski said.
Sam Bankman-Fried, the former CEO of FTX, is accused by U.S. prosecutors of engaging in a scheme to defraud the company's clients by stealing their deposits and using them to cover costs and debts as well as invest on behalf of his cryptocurrency hedge fund, Alameda Research LLC.
Bankman-attorney Fried's stated on Tuesday that his client is weighing all of his legal options.
Legal costs are typically covered by D&O policies, but this is not always the case when fraud is involved.
Due to client confidentiality, insurance sources declined to identify actual or potential clients who might be impacted by policy changes.
Both Genesis, a cryptocurrency lender, and Binance, a cryptocurrency exchange, have financial exposure to FTX. Neither company responded to emails requesting comment.
A D&O insurance policyholder's coverage may now be limited to tens of millions of dollars for the rest of the market, Ziolkowski warned. While the least risky segments of the crypto market, like businesses that own cold wallets storing assets on platforms not connected to the internet, may get cover for up to $1 billion, Ziolkowski said.
According to insurers, the FTX collapse will probably also result in an increase in insurance costs, particularly in the U.S. D&O market. Due to perceived risks and a lack of information regarding prior insurance losses involving cryptocurrencies, rates are already high.
For a trader of digital assets, a typical crime bond would cost $30,000 to $40,000 per $1 million of coverage in order to protect against losses brought on by criminal activity. According to Hugh Wood Canada's Nichols, this contrasts with a traditional securities trader's expense of around $5,000 per $1 million.