Noor Zainab Hussain and Carolyn Cohn
(Reuters) - Insurers are refusing or limiting insurance coverage for customers affected by the bankruptcy of cryptocurrency exchange FTX, leaving traders and digital currency exchangers exposed to losses from hacking, theft or lawsuits, several market players said.
Insurers were no longer willing to write directors and officers (D&O) and asset protection policies for crypto companies due to poor market regulation and price volatility for bitcoin and other cryptocurrencies.
The fall of FTX last month raised concerns.
Insurance market specialists Lloyd's of London and Bermuda are demanding more transparency from crypto companies about their impact on FTX. Insurers also offer extensive policy exclusions for any claims arising from the collapse of a business.
Kyle Nichols, president of brokerage Hugh Wood Canada Ltd, said insurers are asking clients to complete a questionnaire asking if they have invested in FTX or held assets on an exchange.
London-based broker Lloyd's Superscript is offering FTX clients a mandatory questionnaire to describe their interest rate risk, said Ben Davies, head of digital assets at Superscript.
“Let’s say a client has 40% of their total assets in FTX that they can’t access, that would be a reduction, or we would apply an exception that would limit coverage for any claims arising from their funds held in FTX,” he says .. .
Exceptions barring the payment of any claims related to FTX's bankruptcy are contained in insurance policies covering the protection of digital assets and personal liabilities of directors and officers of companies trading cryptocurrencies, five reliable sources told Reuters. According to the broker, some insurers are pushing for a broad exclusion of everything related to FTX from the policy.
The exclusions could act as a fail-safe for insurers and make things even more difficult for companies seeking coverage, according to insurers and brokers.
Bermuda-based crypto insurance company Relm, which previously provided insurance coverage for FTX-related entities, is taking an even more stringent approach.
“If we need to enable a crypto exception or a regulatory exception, we simply won’t provide coverage,” said Relm co-founder Joe Ziolkowski.
D&O PROBLEM
One of the most pressing questions right now, according to Tsiolkowski, is whether insurers will cover D&O policies from other companies that have dealt with FTX, given the challenges exchange executives face.
U.S. attorneys allege former FTX CEO Sam Bankman-Fried was involved in a scheme to defraud FTX customers by misappropriating their deposits to pay expenses and debts and making investments on behalf of his cryptocurrency hedge fund Alameda Research LLC.
A lawyer for Bankman-Fried said Tuesday that his client is considering all possible legal options.
D&O policies used to pay legal fees don't always pay off in cases of fraud.
Insurance sources did not name their clients or potential clients who may be affected by the policy changes, citing confidentiality. Cryptocurrency firms with financial exposure to FTX include Binance, a cryptocurrency exchange, and Genesis, a cryptocurrency lender, who did not respond to emails asking for comment.
While less risky parts of the crypto market, such as cold wallet companies that hold assets on offline platforms, could get up to $1 billion in coverage, D&O insurance coverage could now be limited to tens of millions of dollars per share in another market. Tsiolkovsky said...
Insurers said the drop in FTX could also drive up insurance rates, especially in the US D&O market. The stakes are already high due to the perceived risks and lack of historical loss data for cryptocurrency insurance.
A typical criminal bond used to protect against losses from a criminal act would cost between $30,000 and $40,000 for a $1 million cover for a digital asset trader. According to Nichols of Hugh Wood Canada, that compares to $5,000-$1 million from a traditional stockbroker.
(Reporting by Noor Zainab Husain in Bangalore and Caroline Cohn in London; editing by Lanan Nguyen and Anna Driver)