Insurers Avoid FTX-Linked Crypto Firms As Risks Rise

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COVERAGE DENIED: FTX collapse likely to drive already high crypto insurance rates up, insurers say, while company could stop covering crypto altogether

Insurers are denying or limiting coverage for customers exposed to bankrupt cryptocurrency exchange FTX Trading Ltd, leaving traders and digital currency exchanges uninsured against losses from hacking, theft or lawsuits, said several market players.

Insurers were already reluctant to underwrite protection policies for directors and officers (D&O) and assets of crypto companies due to weak market regulation and the price volatility of bitcoin and other cryptocurrencies.

The collapse of FTX last month amplified concerns.

Photo: Retuers

Insurance market specialists Lloyds of London and Bermuda are demanding more transparency from cryptocurrency companies regarding their exposure to FTX. Insurers also offer broad policy exclusions for any claims arising from business collapse.

Kyle Nichols, president of brokerage Hugh Wood Canada Ltd, said insurers were asking clients to complete a questionnaire asking whether they had invested in FTX or had any assets on the exchange.

Lloyds of London broker Superscript is asking clients who have dealt with FTX to complete a questionnaire to describe the percentage of their exposure, said Ben Davis, Superscript’s head of digital assets.

Let’s say the client has 40% of his total assets at FTX that he cannot access. This is going to be either a downgrade or an exclusion that limits coverage for any claims arising from their funds held on FTX, he said.

Exclusions denying payment of any claims arising from FTX’s bankruptcy are found in insurance policies that cover the protection of digital assets and for the personal liabilities of directors and officers of companies that deal in cryptocurrencies, Five said. assurance sources to Reuters.

Two insurers have pushed for a broad policy exclusion for anything FTX-related, a broker said.

The exclusions could act as a fail-safe for insurers and make it even harder for businesses to seek coverage, insurers and brokers said.

Bermuda-based cryptocurrency insurer Relm, which previously provided coverage for FTX-related entities, is taking an even stricter approach.

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.

One of the most pressing questions is whether insurers will cover D&O policies from other companies that have had dealings with FTX, given the issues facing exchange executives, Ziolkowski said.

US prosecutors say former FTX CEO Sam Bankman-Fried engaged in a scheme to defraud FTX customers by misappropriating their deposits to pay expenses and debts, and to make investments in the name of his hedge fund, Alameda Research LLC.

A Bankman-Fried attorney said Tuesday his client is considering all of his legal options.

D&O policies, which are used to pay legal costs, are not always reimbursed in cases of fraud.

Insurance sources would not name customers or potential customers who may be affected by the policy changes, citing confidentiality.

Companies with financial exposure to FTX include cryptocurrency exchange Binance and lender Genesis.

While the less risky parts of the cryptocurrency market, such as companies that have cold wallets storing assets on non-internet-connected platforms, could benefit from coverage of up to 1 billion US dollars, coverage for D&O policyholders could now be limited to tens of millions of US dollars. dollars for the rest of the market, Ziolkowski said.

The collapse of the FTX is also likely to drive up insurance rates, particularly in the US D&O market, insurers said.

Rates are already high due to perceived risks and a lack of historical data on cryptocurrency insurance losses.

A typical bond used to protect against losses from criminal act would cost between $30,000 and $40,000 per million dollars of coverage for a digital asset trader.

That compares to a cost of around US$5,000 to US$1 million for a traditional securities trader, Hugh Wood Canadas Nichols said.

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