The crypto industry is cratering. Bitcoin prices are at the lowest level since 2020; one platform has banned users from withdrawing funds, including many of the largest crypto companies Coinbase i BlockFi, announced layoffs. This disturbance reflects the economic turmoil that is spreading across the market, but it also serves as a stern warning to everyday people that, generally speaking, a crypto can be valuable one day and worthless the next.
Although the companies that people use to buy and store cryptocurrencies are in some ways similar to banks, these platforms do not have deposit insurance that they have in bank or investment accounts. If the companies that manage these platforms fail, there is no guarantee that people could recover the value of your cryptocurrency. This lack of protection reflects the fact that regulators are still catching up with the crypto industry. It also serves as a reminder that while crypto platforms may look secure – some are publicly traded companies – they operate in an industry with almost no rules and few security networks. Even the UST, the “stable” cryptocurrency that should track the value of the US dollar, collapsed last month, destroying the equivalent tens of billions of dollars.
“My sleep was seriously disturbed, I lost 4 kilograms of weight in a few days, I was in an extremely depressed state,” said Yuri Popovich, a web designer from Kiev who transferred his family’s savings to the UST in the middle of the war in Ukraine. Recode. “Unfortunately, there is no legislation in our country that covers these types of losses.”
Although investing in cryptocurrencies remains extremely risky around the world for many reasons, regular U.S. bank accounts enjoy some of the protection offered by the Federal Deposit Insurance Corporation (FDIC). Founded during the Great Depression to increase confidence in the financial systemThe FDIC is designed to guarantee that account holders will get back at least part of their money case of bank collapse. Banks finance the FDIC, which, in turn, provides bank accounts of up to $ 250,000.
Since crypto platforms are technically not banks and do not pay into the FDIC system, individual crypto accounts do not this form of protection. Meanwhile, crypto investment accounts are generally not supported by the Securities Investor Protection Corporation, which provides accounts managed by brokerage houses, e.g. Loyalty or Vanguardup to $ 500,000 if the firm fails.
“Most people buy cryptocurrencies to speculate, right? They think of it as an investment asset, ”said Lee Reiners, executive director of the Duke Law School’s Global Financial Markets Center. “If you buy Apple shares, there is really no insurance there either. The insurance concept is not really being applied now. ”
The risky nature of cryptocurrencies has become an increasing topic of discussion as several crypto companies are showing signs of stumbling. Coinbase, one of the world’s most popular crypto exchanges, he said in last month’s earnings report that users could theoretically lose access to their cryptocurrencies if the company goes bankrupt. (Coinbase later tried to return the warning blog postand said that “there is never a situation where clients’ funds could be mixed with corporate assets. ”)
Things have only gotten worse for the crypto industry lately. Following the collapse of the UST, it is reportedly the Securities Commission exploring whether the company behind the coin, Terraform Labs, violated it securities law. And last week, Celsius Network, a crypto platform that is not a real bank, but allegedly offers high-yield cryptocurrency lendingSurprisingly forbade its users to withdraw from the platform; securities regulators in several states are I’m researching now that decision. Downtime can be extremely expensive for crypto investors, as the value of a single coin can vary by hundreds or thousands of dollars in just a few hours. Amidst all the disturbances, the price of bitcoin is around $ 20,000,, a sharp drop from a November high of nearly $ 70,000.
“At this point, there is no easy way for clients to determine the nature and extent of their exposure to the bankruptcy of a cryptocurrency trading platform,” said Dan Awrey, a law professor at Cornell. said Barron’s last month. “Buyers should assume that the bankruptcy of the platform would expose them to significant delays in recovery, at the end of which they can only get a few pennies per dollar.”
But there are other risks. A crypto wallet can be hacked, and when someone steals what’s in it, that crypto can be amazing difficult to recover. Some people try to avoid this risk by protecting their cryptocurrency with what is called “refrigerator, ”Which means storing the keys that people use to access their cryptocurrency on a hard drive that is not connected to the Internet. This method carries the same type of risk as any other part of physical assets, and these risks are even more significant for companies that store a lot of other people’s cryptocurrencies in the refrigerator, as well as for cryptocurrency mining operations that produce a new cryptocurrency. using warehouses full of powerful computers.
“You have an earthquake, a flood, fire, lightning, wind, hail,” said Ben Davis, team leader at Superscript, insurance program which covers cryptocurrencies and is registered as a broker in Lloyd’s insurance market. “If you have a lot of expensive equipment in one place, you’ll want it secured.”
While some are conventional insurance providers it slowly warms up to cover cryptocurrencies, there is also a new group of startups that focus specifically on crypto insurance. These include companies such as InsurAce, which covers losses resulting from crypto hacks, and Coincover, which offers NFT insuranceamong several other crypto-focused products that come with insurance.
Some people are already filing claims for cryptocurrency losses. A Ohio judge ruled in 2018 that bitcoin was stolen from someone’s online account as legal property – not money – and should therefore be covered by a man homeowner insurance for its full value, which at the time was $ 16,000. After an explosion at a substation used by a bitcoin miner in upstate New York last month, the affected company, along with crypto-miner Blockfusion, said it would to apply for the income they lost.
More recently, INSURANCE ‘Dan Thomson says the company paid more than $ 11 million to people who bought depegging insurance for its UST, a stabilcoin designed by Terraform Labs (depegging happens when the value of a cryptocurrency no longer matches fiat currency or other assets, that designed for tracking). Company also reimbursed some of his customers after hackers attacked the so-called crypto platform Elephant Money in April.
Although insurance is becoming a slightly larger part of the crypto industry, coverage is still patchwork. Even when a crypto platform buys insurance, there is no guarantee that individual cryptocurrency owners who use that company’s platform are fully protected. Coinbase, for example, says that while certain security events are protected by his insurance, even if the company tries to cure people, its plan may not cover anyone’s entire losses. Overall, most activities in the cryptocurrency world remain unsecured.
“It’s really, really, very little,” said Eyhab Aejaz, co-founder and CEO of Breach Insurance, an insurance company that focuses on cryptocurrencies. “There is simply not enough insurance capacity in the market to insure even a small part of the total exposure that exists.”
This highlights a major problem when it comes to cryptocurrency regulation: there is no strong consensus on what crypto is. Is it internet money, assets, fraud, digital assets, security, a reasonable investment? And since there is no agreement on what a crypto is, it is difficult to come up with a good approach to ensuring its value – or to understand whether it should be protected at all.
Regulators are still studying how to access crypto. The SEC claimed that at least some crypto products were securities, and earlier this year, President Joe Biden ordered federal agencies to begin drafting new rules for industry. Two-Party Law Sensors Kirstin Gillibrand (D-NY) and Cynthia Lummis (R-WY) aims to protect customers’ access to their cryptocurrency in case the crypto exchange they use goes bankrupt, among other proposals to regulate the industry. At least one legislator, representative Josh Gottheimer, has proposed that the government extend FDIC coverage to certain types of stable cryptocurrencies, as long as they are provided by institutions that the government qualifies. The FDIC, the Federal Reserve and the Office of the Currency Controller have suggested similar plans. However, not everyone thinks that it is a great idea or that it makes sense for every type of cryptocurrency.
“If cryptocurrency is a completely speculative investment, then I don’t think it’s wise to put deposit insurance and government support behind those cryptocurrencies,” said Hilary Allen, a law professor at American University. “Investors need to understand that what they are doing is not investing money in a bank. What they do is gamble. ”
Growing efforts to regulate the crypto industry are unlikely to be over any time soon. Meanwhile, all the chaos in the crypto market is causing more and more people to think about the fate of their money. This may not be good news for crypto investors, but it is certainly good news if you are in the growing crypto insurance business.