Insurers shun FTX-linked crypto firms as risks mount

COVERAGE DENIED:
The FTX collapse is likely to lead to a rise in already-high crypto insurance rates, insurers said, while one firm might stop covering crypto altogether

Insurers are denying or limiting coverage to clients with exposure to bankrupt cryptocurrency exchange FTX Trading Ltd, leaving digital currency traders and exchanges uninsured for any losses from hacks, theft or lawsuits, several market participants said.

Insurers were already reluctant to underwrite protection policies for directors and officers (D&O) and assets of crypto companies because of scant market regulation and the volatile prices of bitcoin and other cryptocurrencies.

The collapse of FTX last month has amplified concerns.

Specialists in the Lloyd’s of London and Bermuda insurance markets are requiring more transparency from cryptocurrency companies about their exposure to FTX. The insurers are also proposing broad policy exclusions for any claims arising from the company’s collapse.

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

Lloyd’s of London broker Superscript is requiring clients that dealt with FTX to complete a questionnaire to outline the percentage of their exposure, Superscript digital assets head Ben Davis said.

“Let’s say the client has 40 percent of their total assets at FTX that they can’t access. That is either going to be a decline or we’re going to put on an exclusion that limits cover for any claims arising out of their funds held on FTX,” he said.

The exclusions denying payout for any claims arising out of the FTX bankruptcy are found in insurance policies that cover the protection of digital assets and for personal liabilities of directors and officers of companies that deal in cryptocurrencies, five insurance sources told Reuters.

Two insurers have been pushing for a broad exclusion to policies for anything related to FTX, a broker said.

Exclusions could act as a failsafe for insurers, and make it even more difficult for companies that are seeking coverage, insurers and brokers said.

Bermuda-based cryptocurrency insurer Relm, which previously has provided coverage to entities linked to FTX, takes 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 cofounder Joe Ziolkowski.

One of the most pressing questions is whether insurers will cover D&O policies at other companies that had dealings with FTX, given the problems facing exchange’s leadership, Ziolkowski said.

US prosecutors said that former FTX CEO Sam Bankman-Fried engaged in a scheme to defraud FTX’s customers by misappropriating their deposits to pay for expenses and debts, and to make investments on behalf of his hedge fund, Alameda Research LLC.

A lawyer for Bankman-Fried on Tuesday said that his client is considering all of his legal options.

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

Insurance sources would not name the clients or potential clients that could be affected by policy changes, citing confidentiality.

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

While the least risky parts of the cryptocurrency market — such as companies that own cold wallets storing assets on platforms not connected to the Internet — might get coverage for up to US$1 billion, a D&O insurance policyholder’s coverage could now be limited to tens of millions of US dollars for the rest of the market, Ziolkowski said.

The FTX collapse is also likely to lead to a rise in insurance rates, especially in the US D&O market, insurers said.

The rates are already high because of 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 US$30,000 to US$40,000 per US$1 million of coverage for a digital assets trader.

That compares with a cost of about US$5,000 per US$1 million for a traditional securities trader, Hugh Wood Canada’s Nichols said.