February 2, 2023

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Crypto companies associated with FTX are shunned by insurance companies as risks of infection mount

Crypto companies associated with FTX are shunned by insurance companies as risks of infection mount

Several market participants said that insurers are denying or limiting coverage to clients who experience cryptocurrency exchange FTX bankruptcy, leaving cryptocurrency traders and exchanges without insurance for any losses from hacks, thefts or lawsuits.

Underwriters have already been reluctant to underwrite asset protection, principals and officers (D&O) policies for crypto firms due to scant market regulation and volatile prices for bitcoin and other cryptocurrencies.

Now, the collapse of FTX last month has magnified concerns.

Specialists at Lloyd’s of London (SOLYD.UL) and Bermuda Insurance Markets are asking for more transparency from crypto firms about their exposure to FTX. Insurance companies also suggest broad policy exclusions for any claims that arise from the company’s collapse.

Kyle Nichols, president of brokerage Hugh Wood Canada Limited, said insurance companies ask clients to fill out a questionnaire asking if they have invested in FTX, or hold assets in the exchange.

Lloyd’s of London brokerage firm Superscript provides clients who have transacted with FTX with a mandatory questionnaire to determine the percentage of their exposure, said Ben Davis, head of digital assets at Superscript.

“Let’s say a customer has 40% of their total assets in FTX that they don’t have access to, either that would be a reduction or we’ll make an exception that covers any claims arising from their funds on FTX.”

Five insurance sources told Reuters that the exclusions refusing to pay compensation for any claims arising from the bankruptcy of FTX are in insurance policies that cover the protection of digital assets and the personal liabilities of directors and employees of companies dealing in cryptocurrencies. One broker said two insurance companies are pushing for a broad exclusion of policies on anything related to FTX.

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Insurers and brokers said the exclusions could act as a fail-safe for insurers, and would make it more difficult for companies seeking coverage.

Bermuda-based cryptocurrency insurer Realm, which previously provided coverage for FTX-linked entities, is taking a tougher approach.

“If we had to include a crypto exclusion or a regulatory exclusion, we wouldn’t cover it,” said Relm co-founder Joe Ziolkowski.

D & amp; O question

Now, one of the more pressing questions is whether insurance companies will cover D&O policies at other companies that have FTX dealings, given the problems facing the exchange’s leadership, Ziolkowski said.

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

Bankman-Fried’s attorney said Tuesday that his client is considering all of his legal options.

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

Insurance sources will not name their clients or potential clients who may be affected by policy changes, citing confidentiality. Cryptocurrency 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 less risky parts of the cryptocurrency market, such as companies with cold wallets that store assets on offline platforms, may get cover of up to $1 billion, D&O policyholder cover may now be limited to tens of millions of dollars for the rest, Ziolkowski said. market.

Insurers said the collapse of FTX is also likely to drive up insurance rates, especially in the US D&O market. The rates are already high due to the perceived risk and lack of historical data on cryptocurrency insurance losses.

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A typical crime bond — used to protect against losses from a criminal act — would cost between $30,000 to $40,000 per $1 million of coverage for a digital asset trader. That compares to a cost of about $5,000 per million dollars for a traditional stock trader, said Nichols of Hugh Wood Canada.

(Reporting by Noor Zainab Hussain in Bengaluru and Caroline Cohen in London). Editing by Lanan Nguyen and Anna Driver

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