Insurance of cryptocurrency: how the stock exchange protects 100% of users ‘ funds


Cryptocurrency trade is the circulatory system of modern blockchain industry. However, it is far from perfect and carries certain risks for the players of the stock market and their digital assets. After all for anybody not a secret that large transactions with cryptocurrencies attract the attention of hackers, who regularly attack the centralized cryptocurrency exchanges. But, oddly enough, the solution to this problem offers the financial market, namely insurance. As traders and major investors can insure your digital assets, understood DeCenter.

2018 was the most «rich» to hacker attacks, putting a new record, in which a scammers got about $2.7 million. It started with hacking a Japanese trading platform Coincheck, which has been stolen tokens NEM for about $530 million. After this exchange went bankrupt and assets were compensated by the new investor ― from his pocket. For Coincheck followed BitGrail, Zaif, Bithumb and several playgrounds.

As a result of major break-ins in 2018 criminals have stolen approximately $1 billion in cryptocurrency. While the perpetrators of any mass attacks not found who was behind the perpetrators is not known. For example, analysts believe that the hacker group Lazarus, was responsible for the theft of cryptocurrency amounting to $571 million in 2018, authorities of North Korea.

The main reason for such attention of the hackers is clear: the most popular crypto currency exchange centralized: this means that it is possible to obtain access to a large amount of funds. The quality of protection of cryptocurrency exchanges increases and increased state oversight, but the likelihood of hacker attacks remains high. To protect the funds of 100% is hardly ever going to be possible, but the market could borrow one tool from classic financial markets ― insurance customers.

There would be no happiness, Yes the misfortune has helped

The frequency of mass hacker attacks leading trading platforms in South Korea. So, in late March, the hackers withdrew $13 million from leading stock exchanges of the country Bithumb. Such cases occur with the platform about once a year: in July 2017 from 30,000 users Bithumb kidnapped crypto-assets in billions of won. This was repeated in June 2018, but then at least became known the exact amount of the stolen cryptocurrency ― $31 million. Official of the insurer have Bithumb not, therefore, to preserve the reputation of the administration of the site shall compensate losses from his own funds. And if in 2017 the amount of compensation to one account, was less than $100, a year later, users have got back all the stolen funds.

To find a way to deal with scammers, cryptocurrency exchanges in South Korea have teamed up in the Blockchain-the Association to coordinate common actions. Resulting in the end of 2018, as told by renowned crypto-analyst Joseph young, Upbit, Bithumb, Korbit and Gopax agreed to make account insurance basic requirement for the operation of the crypto currency exchange in the national market.

At that time, the largest Korean exchange Upbit already had insurance from the Corporation Samsung (Yes, it is a major insurer in South Korea). In September 2018 to insure customer assets beginning of the site Korbit. With Bithumb happened a funny thing ― after the attacks of 2018, it became clear that exchange purchased insurance does not cover third-party hacks. Whether fixed Bithumb the mistakes of his insurance policy at the time of the attack in March this year, is not known.

Foremost insurance cryptomeria

In the United States with its well-developed financial system insurance has long been a service of cryptocurrency exchanges. One of the first platforms to introduce insurance programs, became Coinbase. She joined the state insurance system of Federal Corporation on insurance of contributions (FDIC), which involves the payment each client for up to $250,000 in the event of termination of the financial institution. However, you need to understand that it only applies to Fiat money of US residents.

In addition, the FDIC does not cover losses from hacker attacks on «hot», that is, on the online wallets of the exchange. Namely, this is the most common cause of loss of cryptocurrencies for trading platforms, said the head of information security Department Coinbase Philip Martin.

But the exchange came up with the strategy of insurance and «hot» storage. The sum of their insurance coverage in the beginning of April, was increased to $255 million. It seems tiny, but it is worth considering that Coinbase stores online only 2% of user funds ― the rest is distributed on «cold» wallets, which are subject to special storage.

A similar system builds exchange Gemini, owned by the Winklevoss brothers. Fiat account their users are protected with FDIC 2014, and in October 2018, the site acquired financial protection against hacker break-ins «hot» wallets ― Gemini helped the British insurance company Lloyd’s of London. That, incidentally, made by the insurer of Coinbase cryptocurrency assets that is hosted online.

It is important that the funds in the hot wallet will be reimbursed only in the case that the attackers gained access through a weakness in the security system of the exchange. If the criminals managed to gain access from the trader ― including deception ― no one will return his stolen. So, in November 2018, the scammer used the scheme of exchange of SIM cards to the phone number of the victim to access the crypto vaults, and thus stole $1 million. We are talking about maps of the standard eSIM where the operator can remotely assign the SIM card to any number after verification of the client.In August, another American crypto-investor, the same pattern was stolen digital assets for $24 million. Although he invented an original method of refund: filed a lawsuit against mobile operator AT&T.

Financial security for the whales

In November 2018 the portal CoinDesk predicted that the size of the insurance market of crypto-assets is $6 billion. This is a drop in the bucket, considering that the daily trading volume of cryptocurrencies from February to March this year rose from $20 to $40 billion. It turns out that the potential demand is great, but he can’t meet due to poor infrastructure and lack of regulation.

High risk of potential cyber attacks and deter normal users from trading on the centralized cryptomeria. However, the insurance of assets is a key condition for the operation of institutional investors, which for so long waiting on the cryptocurrency market.

As explained by the top Manager, PriceWaterhouseCoopers Henry Arslanian, whales tend not only to protect assets ― in many cases, obtain adequate insurance coverage is a legislative and a legal requirement. But institutional investors are only in the legal field. As previously wrote DeCenter, despite the fact that the number of the crypto custodians is growing every month, institutionally still cautious ― for professional storage of crypto-assets is not yet well developed legislation.

Nevertheless, besides the markets there are many companies that offer custodial services for investors, which must include the refund in case of loss or theft. But, although the quality of such a service should be at a high level, it sometimes also raises questions. Thus, the popular custodian BitGo says that the company is ready to compensate 100% of the lost crypto-asset in the event of break-ins, negligent actions of employees of the company, as well as the loss or theft of the private keys. It may seem that the list includes and online store. In fact, however, the insurance applies only to hardware wallets, said underwriter BitGo (the same firm Lloyd’s of London).

Other firms that provide services of storage of crypto-assets for institucionales ― Xapo, DACC, itBit, and Kingdom Trust. But the demand for institutional money appear fully regulated services for trading digital currencies for the highest requirements in whale, including from the point of view of insurance.

One of them was tZERO, launched in late January. Its funded by the us online retailer Overstock. The service allows you to trade security tokens. Even more promising launching platform for trading crypto-assets Bakkt. This project is the world’s largest futures market operator Intercontinental Exchange (ICE), which controls the new York stock exchange. The total investment in Bakkt has already exceeded $700 million. Although the platform opening was postponed several times, it is only a matter of time.

Insurance is not yet popular cryptocurrency on the market, but its proliferation is inevitable as the industry out of the shadows. To ban the digital currency, it seems, are not collected. On the contrary, the legislation in the major economies of the world develops, an increasing number of large investors. This means that the insurance digital assets on all regulated trading platforms sooner or later will be the same rate as on the classic exchanges. The explanation is simple: only insurance can guarantee that the user will return 100% of the funds lost as a result of theft from the store, whether it’s online wallet or USB flash drive.


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