This article is part of Wellesley Hills Financial’s Market Movements series, found in our weekly newsletter
Despite existing for over thirty years, blockchain technology is still in its infancy. With the release of bitcoin in 2009, the technology gained widespread notoriety and was hailed as a breakthrough advancement, set to disrupt governments’ strangle on fiat currency. However, as bitcoin increased in value over the last half-decade, one of the currency’s premier features quickly became one of its largest drawbacks. Because the technology is based upon decentralization, if a password is lost or stolen, there is no central authority to set things right. There is no bank to reset passwords, there is no FDIC deposit insurance to mitigate losses; In short, there is no recourse.
Pairing the relatively early stage of crypto regulation with the tremendous volatility within the market, insurers have been slow to offer coverage for the asset class. A handful of firms have taken up the mantle, but even those brave enough to stand at the frontier impose restrictions on the maximum value that may be insured, with none offering over $750 million for any client (sorry, Elon – Telsa’s $1.5 billion purchase of bitcoin may be uninsurable).
With established institutions slow to accept the balance sheet risk that is crypto insurance, the crypto community may need to turn inward to find coverage. Firms such as Nexus Mutual hope to decentralize insurance using the same technology that underlies crypto itself; however, giving a decentralized community the ability to decide which risks to underwrite and which claims to payout, may be putting too much faith in individuals. For those with the time and inclination, the Nexus Mutual White Paper is an interesting take on how a decentralized insurance platform could achieve success.
