The cryptographic industry is becoming a crater. Bitcoin prices are the lowest since 2020; a platform has banned users from withdrawing funds, and many of the big crypto companies, such as Coinbase and BlockFi, have announced layoffs. This disruption reflects the economic turmoil that is spreading through the market in general, but it also serves as a strong warning to ordinary people who, in general, Cryptography can be valuable one day and worthless the next.
While the companies that people use to buy and store cryptography are somewhat similar to banks, these platforms do not have the deposit insurance that bank or investment accounts have. If the companies operating these platforms fail, there is no guarantee that people will be able to recover the value of their cryptography. This lack of protection reflects the fact that regulators are still catching up with the cryptographic industry. It also serves as a reminder that while cryptographic platforms may seem secure (some are listed companies), they operate in an industry with almost no rules and few security networks. Even UST, a “stablecoin” cryptocurrency that is supposed to keep track of the value of the U.S. dollar, crashed last month, gutting the equivalent of tens of billions of dollars.
“My sleep was very disturbed, I lost 4 kilos in a few days, I was in an extremely depressed state,” said Yuri Popovich, a Kyiv web designer who transferred his family’s savings to UST in the middle of the war in Ukraine, he said. Recode. “Unfortunately, in our country there is no legislation that covers this type of loss.”
While investing in cryptocurrencies continues to be incredibly risky around the world for many reasons, regular U.S. bank accounts enjoy some protection from the Federal Deposit Insurance Corporation (FDIC). Founded during the Great Depression to boost confidence in the financial system, the FDIC is designed to ensure that account holders will recover at least a portion of their money in the event of a bank collapse. Banks fund the FDIC, which in turn secures bank accounts of up to $ 250,000.
Because cryptographic platforms are not technically banks and do not pay the FDIC system, individual cryptographic accounts do not have this form of protection. Meanwhile, cryptocurrency investment accounts are generally not backed by the Securities Investor Protection Corporation, which secures accounts managed by brokerage firms such as Fidelity or Vanguard, up to $ 500,000 if the company fails.
“Most people buy cryptocurrency to speculate, right? They consider it an invertible asset,” said Lee Reiners, executive director of Duke Law School’s Global Financial Market Center. “If you buy shares of Apple, there’s no insurance either. The concept of insurance doesn’t really apply now.”
The risky nature of cryptography has become a major topic of discussion, as several cryptography companies show signs of hesitation. Coinbase, one of the world’s most popular cryptocurrency exchanges, said in a earnings report last month that users could theoretically lose access to their cryptocurrency if the company went bankrupt. (Coinbase later tried to reverse the warning in a blog post and said that “there is never a situation where customer funds can be confused with corporate assets”).
Things have only gotten worse for the crypto industry lately. Following the fall of the UST, it is said that the Stock Exchange and Securities Commission investigating whether the company behind the coin, Terraform Labs, violated the securities law. And last week, Celsius Network, a cryptocurrency platform that is not a real bank but intended to offer high-yield cryptocurrency loans, suddenly prevented its users from withdrawing from the platform; Securities regulators in several states are now investigating this decision. Downtime can be extremely costly for cryptocurrency investors, as the value of a single currency can vary by hundreds or thousands of dollars in a matter of hours. Amidst all the disruption, the price of bitcoin is about $ 20,000, a sharp drop from its November high of nearly $ 70,000.
“At the moment, there is no easy way for customers to determine the nature and scope of their exposure to the bankruptcy of a cryptocurrency trading platform,” said Dan Awrey, a law professor at Cornell. past Barron. “Customers should assume that the failure of a platform would expose them to significant delays in recovery, at the end of which they could only recover only cents of the dollar.”
But there are other risks as well. A cryptocurrency wallet can be hacked, and once someone steals what’s there, that cryptocurrency can be incredibly difficult to recover. Some people try to avoid this risk by protecting their encryption with what is called “cold storage,” which is equivalent to storing the keys that people use to access their encryption on a hard drive that is not connected to the Internet. This method carries the same risks as any other physical property, and these risks are even more significant for companies that store many other people’s cryptocurrencies in cold stores and for cryptocurrency mining operations that produce new cryptocurrencies. through warehouses. full of powerful computers.
“You had an earthquake, flood, fire, lightning, wind, hail,” said Ben Davis, leader of the Superscript team, an insurance program that covers cryptography and is listed as a broker in the Lloyd’s insurance market. . “If you have a lot of expensive equipment in one place, you’ll want it insured.”
While some conventional insurance providers are slowly warming up to cover cryptography, there is also an emerging crop of startups that focus specifically on crypto insurance. These include companies such as InsurAce, which covers losses from hackers, and Coincover, which offers NFT insurance, among several other cryptocurrency-focused products that include insurance.
Some people are already filing claims for cryptographic loss. An Ohio judge ruled in 2018 that bitcoin stolen from a man’s online account was legally owned, not money, and should therefore be covered by the man’s owner’s insurance for its value. total, which at that time was $ 16,000. After an explosion at a substation used by a bitcoin miner in New York State last month, a company that was affected, along with cryptocurrency Blockfusion, said it would file a claim for lost revenue. .
More recently, Dan Thomson of InsurAce says the company paid more than $ 11 million to people who bought “depegging” insurance for its UST, the stable currency designed by Terraform Labs (depegging occurs when the value of a cryptocurrency no longer matches the fiat currency or otherwise). asset, which is designed to track). The company also reimbursed some of its customers after hackers attacked a cryptocurrency platform called Elephant Money in April.
While insurance is becoming a slightly larger part of the crypto industry, coverage is still a mosaic. And even when an encryption platform buys insurance, there is no guarantee that individual cryptocurrency holders using that company’s platform will be fully protected. Coinbase, for example, says that while certain security events are protected by your insurance, even if the company tries to integrate people, your plan may not cover all of someone’s losses. . In general, most of the activity in the world of cryptography continues without insurance.
“It’s very, very, very small,” said Eyhab Aejaz, co-founder and CEO of Breach Insurance, a crypto-focused insurance company. “There just isn’t enough insurance capacity in the market to insure even a small fraction of the total exposure out there.”
This highlights an important issue when it comes to regulating cryptography: there is not much consensus on what cryptography is. Is it Internet money, property, a scam, a digital asset, security, a reasonable investment? And since there is no agreement on what cryptography is, it’s hard to find a good approach to ensuring its value, or figuring out if it should even be protected in the first place.
Regulators are still studying how to address cryptography. The SEC has argued that at least some cryptocurrencies are securities, and earlier this year, President Joe Biden ordered federal agencies to begin drafting new rules for the industry. A bipartisan bill by Senator Kirstin Gillibrand (D-NY) and Cynthia Lummis (R-WY) aims to protect customers’ access to their cryptocurrency in the event that the cryptocurrency exchange they use ruins, including other proposals to regulate the industry. . At least one legislator, MP Josh Gottheimer, has proposed that the government extend FDIC coverage to certain types of stable cryptocurrencies, as long as they are provided by government-qualified institutions. The FDIC, the Federal Reserve and the Currency Controller’s Office have suggested similar plans. However, not everyone thinks it’s a great idea or makes sense for every type of crypto.
“If cryptography is a totally speculative investment, then I don’t think it’s prudent to put deposit insurance and government support behind these cryptographic assets,” said Hilary Allen, a law professor at American University. “Investors need to understand that what they’re doing is not putting money in a bank. What they’re doing is gambling.”
The growing effort to regulate the cryptographic industry is unlikely to end soon. Meanwhile, all the chaos in the crypto market is making more people 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 business of cryptocurrency insurance.