The security breach at cryptocurrency exchange WazirX, which led to the theft of more than $230 million, has prompted other actors to launch programs to secure client wallets and funds. These measures may include compensatory funds to settle the accounts of clients affected by cyberattacks and theft of funds, among others, people familiar with the development said.
However, experts have said that introducing traditional insurance to protect crypto assets will be a difficult task for the industry.
“I don’t think there is any exchange that can claim that funds are 100 per cent insured. We have tried to get insurance in the past but we didn’t find any provider who was willing to insure these assets. It’s not an easy process,” Nischal Shetty, founder and chief executive officer (CEO) of WazirX, told Business Standard last week during a call.
CoinSwitch, another local cryptocurrency exchange, claims to have its custodial wallets secured to prevent theft.
“We store users’ crypto assets in industry-leading custodial wallets, designed with advanced security measures to prevent unauthorized access or theft. Our custodial wallets are secured by reputable providers, offering an additional layer of protection,” said Balaji Srihari, Chief Business Officer at CoinSwitch, in response to queries.
The lack of legislation requiring mandatory insurance provisions has exacerbated the sector’s problems.
“The lack of growth in India’s virtual digital asset (VDA) insurance sector is due to regulatory uncertainty and the absence of mandates requiring exchanges to insure assets under their custody,” said Navodaya Singh Rajpurohit, legal partner at Coinque Consulting and founder of Pravadati Legal.
As the cryptocurrency sector is still in its infancy, Rajpurojit explains that the lack of a clear classification for VDAs presents a challenge for insurance companies willing to underwrite cryptocurrency exchanges.
“Ambiguity in the classification of digital assets such as Bitcoin, security tokens and stablecoins complicates risk assessment. Without clear guidelines, insurers are unsure of how to price these risks. This is in contrast to some of the Indian exchanges, which have insurance policies from digital asset insurers,” he said.
WazirX’s Shetty bases his argument about the lack of crypto insurance in the industry on the constant evolution of the sector.
“Insurers also need to understand what best practices are for the industry. These evolve on a quarterly basis. The industry is new and these types of incidents still occur every three to six months, making underwriting difficult for providers,” he added.
He explained that WazirX contacted Liminal Custody, its wallet service provider whom it blamed for the security breach, if they had any insurance coverage on the funds lost in the theft.
Cyberattacks on cryptocurrency exchanges or cryptocurrency thefts are a very common phenomenon worldwide. 2022 was the biggest year in history for cryptocurrency hacks, with $3.8 billion stolen from cryptocurrency companies, according to a report by Chainanalysis.
Globally, cryptocurrency exchanges have turned to players specializing in cryptocurrency insurance. For example, UK-based financial services firm Lloyd’s offers an insurance policy to protect cryptocurrencies stored in online wallets against theft or digital heists. This liability insurance policy, introduced in 2020 during the cryptocurrency boom, has a dynamic limit. The limits increase or decrease with a change in the price of crypto assets.
Additionally, the policy covers protection against losses arising from the theft of cryptocurrencies stored in online hot wallets, according to the company’s website.
First published: August 4, 2024 | 17:35 IS
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