Dec 19 (Reuters) – Insurers are denying or limiting coverage to customers exposed to bankrupt crypto exchange FTX, leaving digital currency traders and exchanges uninsured for any damage from hacks, thefts or lawsuits, several market participants said.
Insurers were already reluctant to accept asset and directors and officers (D&O) protection policies for crypto companies due to the lack of market regulation and the volatile prices of Bitcoin and other cryptocurrencies.
Now, the collapse of FTX last month has heightened concerns.
Insurance market experts at Lloyd’s of London (SOLYD.UL) and Bermuda are demanding more transparency from crypto companies about their exposure to FTX. Insurers also offer broad policy exclusions for any claims arising from the company’s collapse.
Kyle Nichols, president of broker Hugh Wood Canada LLC, said insurers require clients to fill out a questionnaire asking if they have invested in FTX or have assets on the exchange.
Lloyd’s of London broker Superscript gives clients who deal with FTX a mandatory questionnaire to outline their exposure percentage, 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, it’s either going to be a decline or we’re going to exclude that limits the coverage of any claims arising from their funds. was held at FTX,” he said.
Exclusions denying payment of any claims arising from FTX’s bankruptcy are found in insurance policies covering digital asset protection and personal liability for directors and officers of crypto-trading firms, five insurance sources told Reuters. Several insurers are pushing for broad exclusions on policies for anything related to FTX, the broker said.
Insurers and brokers say the exclusions could be unsafe for insurers and make it more difficult for companies seeking coverage.
Bermuda-based crypto insurance company Relm, which has previously provided coverage to entities linked to FTX, is taking a more stringent approach.
“If we have to include a crypto-exclusion or a regulatory exclusion, we simply won’t offer coverage,” said Relm co-founder Joe Ziolkowski.
One of the most pressing questions now is whether insurers will close D&O policies at other companies that have done business with FTX given the problems facing exchange management, Ziolkowski said.
U.S. 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 invest on behalf of his crypto hedge fund, Alameda Research LLC.
Bankman-Fried’s attorney said Tuesday that his client is considering all of his legal options.
D&O policies used to pay legal expenses do not always pay in cases of fraud.
Insurance sources would not name their clients or potential clients who could be affected by the policy changes, citing confidentiality. Crypto companies with financial exposure to FTX include Binance, a crypto exchange, and Genesis, a crypto lender, neither of which responded to emails seeking comment.
While the least risky parts of the crypto market, such as companies with cold wallets that store assets on platforms not connected to the Internet, can receive up to $1 billion in coverage, a D&O insurance policyholder’s coverage may now be limited to tens of millions. dollars for the rest of the market, Ziolkowski said.
The collapse of FTX is also likely to drive up insurance prices, especially in the US D&O market, insurers say. Rates are already high due to the perceived risks and lack of historical data on cryptocurrency insurance losses.
A typical crime bond, used to protect against losses resulting from a criminal act, will cost $30,000-$40,000 for a digital asset seller for $1 million in coverage. That compares with about $5,000 per $1 million for a traditional stock trader, says Hugh Wood Nichols of Canada.
Reporting by Noor Zainab Hussain in Bengaluru and Carolyn Cohn in London; Editing by Lanan Nguyen and Anna Driver
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