Insurers Avoid FTX-Linked Crypto Firms as Contagion Risk Increases

Dec 19 (Reuters) – Insurers deny or limit coverage to clients exposed to bankrupt crypto exchange FTX, leaving traders and digital currency exchanges uninsured against losses from hacking, theft or lawsuits, several said market participants.

Insurers were already reluctant to write directors and officers (D&O) and asset protection policies for cryptocurrency companies due to poor market regulation and price volatility for Bitcoin and other cryptocurrencies.

Now, the FTX crash last month has raised concerns.

Insurance market specialists at Lloyd’s of London (SOLYD.UL) and Bermuda are demanding more transparency from cryptocurrency firms about their exposure to FTX. Insurers are also proposing broad policy exclusions for any claims arising from the company’s collapse.

Kyle Nichols, president of broker Hugh Wood Canada Ltd, said insurers were asking clients to fill out a questionnaire asking whether they invested in FTX or held assets on the exchange.

Lloyd’s of London broker Superscript is giving clients who dealt with FTX a mandatory questionnaire to outline the percentage of their exposure, said Ben Davis, digital asset lead at Superscript.

“Let’s say the client has 40% of their total assets in FTX that they can’t access, that will be a decrease or we’re going to apply an exclusion that limits coverage for any claims arising out of their funds held in FTX,” he said. .

Exclusions denying payment of any claims arising out of FTX’s bankruptcy are found in insurance policies covering the protection of digital assets and the personal liabilities of directors and officers of cryptocurrency trading companies, they told Reuters five insurance sources. A couple of insurers have been pushing for a broad policy exclusion for anything FTX-related, a broker said.

The exclusions can act as a failsafe for insurers and will make things even more difficult for companies seeking coverage, insurers and brokers said.

Bermuda-based crypto insurer Relm, which previously provided coverage to entities linked to FTX, takes an even stricter approach.

“If we have to include a crypto-exclusion or a regulatory exclusion, we’re just not going to offer the coverage,” Relm co-founder Joe Ziolkowski said.

QUESTION D&O

Now, one of the most pressing questions is whether insurers will cover D&O policies on other companies that have dealt with FTX, given the problems facing the exchange’s leadership, Ziolkowski said.

US prosecutors say former FTX CEO Sam Bankman-Fried engaged in a scheme to defraud FTX clients by misappropriating their deposits to pay expenses and debts and make investments on behalf of his crypto hedge fund. , Alameda Research LLC.

An attorney for Bankman-Fried said Tuesday that his client is considering all of his legal options.

D&O policies, which are used to pay legal costs, don’t always pay out in cases of fraud.

The insurance sources did not name their clients or potential clients who could be affected by the policy changes, citing confidentiality. Cryptocurrency firms with financial exposure to FTX include Binance, a cryptocurrency exchange, and Genesis, a cryptocurrency lender, neither of which responded to emails seeking comment.

While less risky parts of the crypto market, such as companies that own cold wallets that store assets on offline platforms, can get coverage of up to $1 billion, a D&O policyholder’s coverage can now be limited to tens. million dollars for the rest of the market, Ziolkowski said.

The collapse of FTX is also likely to lead to an increase in insurance rates, especially in the US D&O market, the insurers said. Rates are already high due to perceived risks and a lack of historical data on cryptocurrency insurance losses.

A typical crime bond, which is used to protect against losses resulting from a criminal act, would cost between $30,000 and $40,000 for $1 million of coverage for a digital asset trader. That compares with a cost of about $5,000 for $1 million for a traditional securities broker, said Nichols of Hugh Wood Canada.

Reporting by Noor Zainab Hussain in Bengaluru and Carolyn Cohn in London; Edited by Lananh Nguyen and Anna Driver

Our standards: The Thomson Reuters Trust Principles.

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