The security breach at crypto exchange firm WazirX which resulted in the theft of over $230 million, has prompted other players to roll out programmes that secure customers’ wallets and funds. These measures may include compensatory funds to settle accounts of customers affected by cyberattacks and theft of funds, among others, people close to the development said.
Experts have however said that introducing traditional insurance to protect crypto assets is going to be a tall order for the industry.
“I don’t think there is any exchange which can claim that the funds are 100 per cent insured. We tried to get insurance in the past, but we did not get any provider who would be willing to insure these assets. It’s not an easy process,” Nischal Shetty, founder and chief executive officer (CEO) of WazirX, told Business Standard last week over a call.
CoinSwitch, another homegrown crypto exchange, claims to have its custodial wallets insured to prevent theft.
“We store users’ crypto assets in industry-leading custodial wallets designed with advanced security measures to prevent unauthorized access or theft. Our custodial wallets are insured by reputed providers, offering an additional layer of protection,” said Balaji Srihari, business head, CoinSwitch, in response to queries.
A lack of legislation that requires a provision for mandatory insurance has added to the industry’s woes.
“The lack of growth in India’s virtual digital assets’ (VDA) insurance sector stems from regulatory uncertainty and absence of mandates requiring exchanges to insure the assets in their custody,” said Navodaya Singh Rajpurohit, legal partner, Coinque Consulting and founder, Pravadati Legal.
With the crypto sector still in its infancy, Rajpurojit explains that the lack of clear classification for VDAs presents a challenge for insurance companies willing to underwrite crypto exchanges.
“Ambiguity in classifying digital assets like Bitcoin, security token and stablecoins complicates risk assessment. Without clear guidelines, insurers are unsure how to price these risks. This contrasts with some of the Indian exchanges, which have insurance policies from digital asset insurers,” he said.
Shetty from WazirX hinges his argument about the lack of crypto insurance in the industry on the constant evolution of the sector.
“Insurers also need to understand what the best practices for the industry are. They are evolving on a quarterly basis. The industry is new, and such incidents keep happening every three to six months, making it hard for providers to underwrite,” he added.
He explained that WazirX has reached out to Liminal Custody, its wallet service provider that it has blamed for the security breach, if they had any insurance coverage over the funds lost to the heist.
Cyber-attacks on crypto exchanges or crypto thefts is a very common phenomenon globally. 2022 was the biggest year ever for crypto hacking, with $3.8 billion stolen from crypto currency businesses, according to a report from Chainanalysis.
Globally, crypto exchanges have relied on players who specialise in crypto insurance. For instance, UK-based financial services firm Lloyd’s provides an insurance policy to protect cryptocurrencies that are stored in online wallets against thefts or digital heists. Introduced in 2020 during the crypto boom, this liability insurance policy has a dynamic limit. The limits increase or decrease with a change in the price of crypto assets.
Moreover, the policy covers protection against losses arising from the theft of cryptocurrency that are held in online, hot wallets, according to the company’s website.
First Published: Aug 04 2024 | 5:35 PM IST
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