Wary insurers watch cryptocurrency craze from the sidelines

If Elon Musk’s Tesla wanted to insure all of its recent $1.5 billion bitcoin investment against the myriad of pitfalls it could encounter, like hacks, theft, and fraud, it would be out of luck.

Insurers have yet to catch up with the growing acceptance of cryptocurrencies as an investment and in commerce, Mr. Musk said last month Tesla’s customers can now use bitcoin as payment.

Scant regulation and volatile prices of bitcoin and other cryptocurrencies make many insurers reluctant to underwrite the risks, despite booming demand for protection of digital assets and for personal liabilities of directors and executives of companies that deal with cryptocurrencies.

Insurers and brokers estimate that of the few that provide such insurance, none can offer coverage beyond $750 million for any client.

Tesla did not respond to a Reuters request for comment.

The risks are considerable, with U.S.-based cybersecurity company CipherTrace estimating reported losses from theft, hacks, and fraud totaling $1.9 billion in 2020.

While both crime and demand for protection have tracked cybercurrencies’ meteoric rise, underwriting such risks remains a niche business offered by specialist insurers in Lloyd’s market and in Bermuda.

The high risk of hacking means smaller companies seeking protection for their “hot wallets” — digital assets stored online — can typically get just about $10 million covered, with the largest limits rarely exceeding the $100 million to $200 million range, insurers and brokers said.

Legal ambiguity surrounding the assets, with top regulators from across the world calling for global rules for cryptocurrencies, also acts as a deterrent for insurers.

Cryptocurrencies have struggled to win the trust of mainstream investors and the general public due to their speculative nature and potential for money laundering.

Insurance for directors and executives of cryptocurrency companies, such as exchanges or custodians seeking to protect their personal assets, is also in short supply, brokers and insurers said.

A potential large drop in the value of cryptocurrencies could trigger lawsuits from investors, which in turn could leave the insurer on the hook if the suit affected the personal assets of a company’s executives.