Canadian Crypto & Blockchain Insurance Solutions
Author: Kyle Muscat
The introduction of decentralized, blockchain-based technologies has been a catalyst of rapid innovation across nearly every industry. It has challenged traditional economic frameworks and will continue to revolutionize the way we operate going forward. Many will now understand this as the rise of cryptocurrencies, NFTs and the more widespread exploration into related blockchain-enabled systems of organization.
Entrepreneurs operating within this web3 ecosystem continue to introduce novel, web-based products and ideas into the world. The challenge however is that many of the traditional service providers such as banks and insurance companies often fall behind to meet the needs of these emerging business models. That is why we have created a dedicated web3 insurance practice geared towards addressing the unique set of risks facing this industry.
In this article we will provide an overview of the insurance solutions that have been developed to support the wider web3 ecosystem.
Types of web 3.0 organizations we can insure
Our team has been at the forefront of insuring Canadian based blockchain technology and related web3 organizations. This includes:
- Crypto exchanges
- Peer-to-Peer (P2P) marketplaces
- NFT developers and projects
- Cryptocurrency mining operations
- Blockchain-based gaming, dApps and De-Fi organizations
- Cybersecurity & audit firms
- Hot & cold storage wallet providers
- Private Equity, VC & related financial institutions
Top 6 Types of Insurance for Blockchain & Crypto Organizations
Each of the organizations classified above are faced with a unique set of risks inherent to their operations. For example, crypto exchanges, P2P marketplaces and hot wallet providers often serve as custodians of their user’s cryptographic assets. Should a loss occur, these organizations are not eligible to rely on the Canadian Deposit Insurance Corporation (CDIC) scheme offered to traditional commercial banks and savings institutions. For crypto mining operations, it may be critical to protect against physical damage to mining rigs and related property.
Below are 6 of the most relevant coverages available to these types of organizations:
- Cyber liability
- Errors & Omissions (E&O) – Professional Liability
- Commercial General Liability (CGL)
- Directors & Officers (D&O)
- Physical property coverage
- Digital Assets and crypto insurance
Top 3 Insurance Claims experienced by Crypto & Blockchain Organizations
It is well understood that no two organizations are exactly alike. Each offer a unique value proposition to specific customer segments and can differ widely in terms of corporate organization, technology and internal competency. Despite these many differences, there does exist some commonality amongst web3 companies with regards to insurable risk and claims.
By extension, our team has compiled a list of the top 3 most common insurance claims experienced by crypto, blockchain and related technology companies.
#1. Cyber Insurance Claims
Given the frequent reliance on web-based applications, systems and software – it should come as no surprise that cyber security remains a top concern for management teams. Despite this focus, crypto and blockchain companies are frequently targeted by cyber criminals and malicious actors around the world. This is often due to the high-value nature of potential disruptions caused by system exploitation.
As a result we have seen an increase in cyber-related losses for which cyber policies are to respond. In fact, StatsCan has released a report stating that nearly 1 in 5 Canadian businesses were impacted by a cyber security incident over 2021 alone.
Cyber Liability Claims Example
Let’s assume that a Canadian crypto trading platform requires users to provide their basic personal details and legal identification in order to register with a trading account. Now in their fifth year of operations, the exchange boasts over 600,000 individual user accounts. After performing some regular system audits, it is discovered that a malicious 3rd party actor had entered the system and copied the individual user data of all trading accounts.
The cost of such a breach is quite significant; from system investigation and repair through to notification and monitoring as required under Canada’s PIPEDA legislation.
#2 – Professional Liability (E&O) Claims
Professional liability claims are another common type that we have frequently seen across the industry. This can generally be defined as any instance in which an organization is sued for failing to meet a reasonable standard of care in the performance of their duties. In such circumstances, an Errors & Omissions or E&O policy would respond to protect against the cost of defense and/or potential settlement.
Professional Liability Claims Example
Let’s suppose that a blockchain security audit firm was contracted to perform a protocol audit and security testing on behalf of a new project. At the end of the engagement, the project team was given the greenlight and they opened up to the public. Shortly thereafter, a major system vulnerability was discovered – one which was not identified during the audit. The project team then launched a lawsuit seeking compensation for the resultant financial damages incurred as a result of the oversight on behalf of the audit firm.
#3 – Director’s & Officers Liability (D&O) Claims
A Directors & Officers – or D&O policy is used to protect the decision makers in an organization should they be personally sued for actions carried out in company. It’s important to note that these claims can arise from a number of parties, such as employees, suppliers, investors, customers and even competitors. We have observed a number of D&O claims within the web3 space with the trend only expected to continue given the increasingly litigious market environment.
D&O Claims Example
Let’s assume that a blockchain development company has completed their series A; raising $25M at a post money valuation of $175M. The company executives then decided to acquire one of their competitors in a cash deal for $10M. Over the following year, the company failed to turn a profit as purported post-acquisition synergies failed to materialize. Disgruntled investors then filed a lawsuit against the company executives claiming poor discretion and misuse of funds. The D&O policy would then step in to respond in defense and/or settlement of the suit.
Interested in Learning More?
Let’s face it; losses can happen. It is therefore critical that those operating in the web3 space are able to protect their bottom line through the transfer of risk onto the insurance markets. The first step in this process would be to partner with an experienced insurance broker who understands the nature of your business and how to navigate the global insurance marketplace.
For those interested in learning more, we encourage you to contact us for a preliminary discussion with our dedicated web3 insurance team.