Cryptocurrencies are gaining acceptance among mainstream asset managers. Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, said last year that he owns bitcoin, having previously expressed doubts about the future of crypto.
Even more significantly, US President Joe Biden issued an executive order on 11 March preparing the ground for federal regulation of crypto. Biden also asked the Federal Reserve to explore whether the central bank should create its own digital currency. The move should help legitimise the digital asset industry and further encourage professional investors to explore the potential of diversifying into crypto. Insurance for the digital asset industry is now the final frontier stopping crypto from fully entering the mainstream of finance, says Ben Davis, team leader, digital assets at Superscript, the first UK insurtech company to become a Lloyd’s broker.
Davis says: “Digital asset companies lack insurance options simply because insurers feel like they don’t really understand the sector or the risks it faces. Yet, insurance is critical if crypto is to enter the mainstream of the investment world. Without it, the biggest players are left unregulated, and their customers unprotected.”
Superscript has built a dedicated digital assets team, led by Davis, to bridge the gap between insurers and the digital assets space. He adds: “I have been involved in digital assets for many years and insurance for even longer, and so have all my colleagues – we are from the crypto community and are advocates for that community. We understand the language they speak, share their concerns and ambitions, including a dedication to accelerating the mainstream adoption of digital assets. We believe the key is allowing crypto entrepreneurs to take risks, safe in the knowledge that we will catch them if they fall.”
The deep connections between Superscript and the digital asset ecosphere are vital, given the latter’s dynamic and diverse nature. The sector’s stakeholders range from custodians (which look after the digital assets), crypto exchanges, studios involved in non-fungible tokens (NFTs), decentralised finance platforms and protocols, to the venture capitalists and hedge funds that are investing in crypto.
Davis’ team is engineering a comprehensive suite of insurance products for Web 3.0 businesses, specifically designed to meet their commercial insurance needs. These products are already available, with more to follow later this year. Superscript has built up a multi-stream of premiums from scratch.
“We’re working with some of the biggest names globally in the digital asset industry, which is really exciting, and the business is gaining momentum,” says Davis. While 200 digital asset businesses applied to Superscript for insurance in 2021, that figure has risen past 100 already this year.
A key challenge is a lack of the information required to assess and price risk. Superscript is exploiting leading-edge technology, such as machine learning and big data, to provide insurers with all the data they need to properly assess risk. Dan Ross, technical lead – digital assets at Superscript says: “We have developed a proprietary model that allows us to cross-reference the risks facing a business against 2,000 data points.” That allows insurers to feel comfortable taking on the business brokered by Superscript. Ross helped Superscript become the first Lloyd’s broker to be accepted into Lloyd’s Labs – cohort 7 – to develop the machine learning algorithm that is used to aid their technical risk analysis.
Insurance is critical if crypto is to enter the mainstream of the investment world. Without it, the biggest players are left unregulated, and their customers unprotected
Spreading knowledge about the digital asset industry within the insurance sector is vital, argues Davis, because insurers hold a number of misconceptions. Chief among these is that the risks facing this newly emergent technology are fundamentally different from those that challenge traditional businesses. In reality, many of the risks – including cyber attacks and the associated problems of data breach, ransomware and business interruption – are the same. Just like other companies, crypto firms also require professional indemnity insurance to cover breaches of contract, or errors and omissions. There are, however, some risks that are specific to crypto, such as the theft of private keys (passwords that allow owners to access their assets) and intellectual property infringement related to NFTs.
Davis says: “Most underwriters think crypto is incredibly complex and they will never be able to understand digital assets, when in reality the majority of the risks are really no different from those they already insure in many other sectors. Moreover, we can act as pathfinders, leading them through those areas that do require specialist expertise.”
Other myths include the impact of crypto on the environment. Despite the headlines, Davis says, mining of bitcoin only accounts for 0.14%, of global energy consumption, where industries like manufacturing make up 77%. He adds: “Christmas lights around the world consume roughly the same amount of energy as the bitcoin network.”
Illicit activity is another concern. Yet Davis points out that it has been proven many times that bitcoin is not the instrument for illicit activity that people make it out to be, with illegal uses accounting for less than 1% of all activity on the bitcoin blockchain.
Finally, the argument that crypto is just a bubble that will soon burst and is therefore not worth pursuing seems less credible every day. The fact that the Federal Reserve (which issues US Treasury bonds, the benchmark against which all investment risks are calculated) has now been instructed to explore the creation of a digital currency surely shows that crypto is here to stay.
Over the past five years, Davis says, the Superscript team has countered every argument that insurers have put forward to stay out of the sector. Superscript’s combination of proprietary machine-learning technology, data science, underwriting expertise and partnerships with leading underwriters and digital asset companies will ensure the company plays a prominent role as digital assets move into the limelight in the coming years.
Those insurers that have entered are finding business very profitable. While prices of crypto will almost certainly remain volatile, there is clearly high and growing demand for businesses utilising and gaining exposure to digital assets and then ultimately for insurance solutions. That, Davis adds, means that the wider financial industry has an obligation to understand the sector and provide solutions that will allow the industry to flourish and develop in a secure environment.
Get in touch, see how Superscript can help find you the right insurance for your digital asset business, gosuperscript.com/advised
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