(Reuters) — Insurers are denying or limiting coverage to clients with exposure to bankrupt cryptocurrency exchange FTX, leaving digital currency traders and exchanges uninsured for potential losses from hacking, theft or lawsuits, several market participants said.
Insurance companies were already reluctant to underwrite asset and board and officer protection policies for crypto companies due to tight market regulations and the volatile prices of Bitcoin and other cryptocurrencies.
Now the collapse of FTX last month has added to the concern.
Lloyd’s of London and Bermuda insurance market specialists demand more transparency from crypto companies about their exposure to FTX. The insurers also propose broad policy exclusions for any claims arising as a result of the company̵7;s collapse.
Kyle Nichols, CEO of broker Hugh Wood Canada Ltd., said the insurers required clients to fill out a questionnaire asking if they invested in FTX or had assets on the exchange.
Lloyd’s of London broker Superscript gives clients who traded FTX a mandatory questionnaire to describe the percentage of their exposure, said Ben Davis, head of digital assets at Superscript.
“Let’s say the customer has 40% of their total assets on FTX that they can’t access, it’s either going to be a downturn or we’re going to put an exclusion that limits coverage for any claims that arise out of their money held on FTX, he said.
The exclusions denying payment for any claims arising from the FTX bankruptcy are in policies covering the protection of digital assets and for personal liabilities of directors and officers of companies that trade in crypto, five insurance sources told Reuters. A couple of insurance companies have pushed for a broad exemption from insurance for anything related to FTX, one broker said.
Exclusions can act as a failsafe for insurers and will make it even more difficult for businesses seeking coverage, insurers and brokers said.
Bermuda-based crypto insurance company Relm, which has previously provided coverage to entities linked to FTX, is taking an even stricter approach.
“If we have to include a crypto exclusion or a regulatory exclusion, we simply won’t offer coverage,” said Relms co-founder Joe Ziolkowski.
Now, one of the most pressing questions is whether insurers will cover D&O policies at other companies that had business with FTX, given the problems facing the exchange’s leadership, 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 for expenses and debts and to make investments on behalf of his crypto hedge fund, Alameda Research LLC.
An attorney for Bankman-Fried said Tuesday that his client is considering all of his legal options.
D&O policies, which are used to pay legal expenses, do not always pay out in cases of fraud.
Insurance sources would not name their clients or potential clients who could be affected by 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 that own cold wallets that store assets on platforms not connected to the Internet, can be covered for up to $1 billion, a D&O policyholder’s coverage can now be limited to tens of millions of dollars for the rest of the market, said Mr. Ziolkowski.
The FTX collapse is also likely to lead to an increase in insurance rates, particularly in the US D&O market, insurers said. Interest 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 — would cost $30,000 to $40,000 per $1 million in coverage for a digital asset trader. That compares with a cost of about $5,000 per $1 million for a traditional securities dealer, said Hugh Wood Canada’s Nichols.