Understanding Crypto Insurance

The crypto ecosystem continues to rapidly evolve, with each new startup building on and interacting with an enormous variety of other crypto companies. That interdependency both accelerates building and means that most companies in the space need specialized insurance to protect against unique risks, including:  

• Centralized Exchanges (CEXs)
• Decentralized Protocols (DeFi)
• Wallet Providers (custodial, self-custodial, MPC, and more)
• Miners
• Staking providers
• NFT projects
• Token issuers
• Stablecoin issuers
• Real World Assets (RWA) 
• Payments
• Asset managers
• Custodians
• Analytics
• Accounting & Tax

You’re here because you want to understand the importance of crypto-specific insurance and how it can protect your business from potential risks. This post will guide you through the different types of risks companies in the crypto space face and how specialized insurance can address these concerns. 

It likely comes as no surprise to you that most insurance companies won’t even consider insuring crypto companies. Even among the ones that do, most offer policies that are inadequate for the specific risks of crypto and lack the expertise to tailor those protections further. These outdated policies and brokers without expertise can leave you and your business exposed to significant financial losses and operational disruptions. 

By understanding these limitations and opting for specialized insurance tailored to the crypto industry, your focus can remain on driving innovation and growth. So let’s talk about those threats that should be top of mind for any startup leader in the crypto industry.

What are the risks facing crypto companies?

If you're running a cryptocurrency startup, you already know it’s an environment rife with risk including regulatory uncertainty, legal challenges, and novel security threats. There are nonetheless increasingly established ways to proactively manage the uncertainties that abound and protect your business.

Regulatory Risks

Risk: Regulatory Investigations

These situations occur when government agencies or regulatory bodies suspect that your company may have violated laws or regulations governing its operations. This can include potential breaches of securities laws, anti-money laundering (AML) regulations, consumer protection laws, or other financial compliance requirements.

Example scenario: The SEC issues a Wells Notice to US Labs Co concerning the issuance and distribution of a token. The founders engage their outside counsel to respond to the voluminous requests for information and prepare for the anticipated formal lawsuit.

Legal Risks

Risk: Customer Lawsuits

These scenarios arise when your technology failure causes a loss due to negligence, product failures, misrepresentation, or breach of warranty leading to customer lawsuits.

Example scenario: A software bug in DeFi Co’s protocol allows nefarious actors to take control of crypto users’ funds, resulting in significant financial losses for thousands of customers. Due to allegations of negligence and misrepresentation about the product's reliability, DeFi Co faces multiple customer lawsuits, threatening the startup's financial stability and reputation. The startup follows its internal procedures to engage counsel and consultants to limit further damage and proactively notify users.

Risk: Shareholders’ Lawsuits

In these scenarios, shareholders sue because they believe the company's actions (or lack of action) have directly hurt their interests or violated their rights and expectations.

Example scenario: Investors in Wallet Co file a lawsuit against the company after a public disclosure that a senior security executive’s credentials were faked, leading to customers canceling contracts and threatening the financial viability of the company. The startup's founders, upon learning of the misrepresentation, took immediate action by terminating the executive, fully cooperating with regulatory authorities, and implementing additional background checks to restore investor and market confidence.

Security Risks

Risk: Data breach due to employee or contractor mistake

These scenarios include unintentional mistakes made by an employee or contractor that lead to a data breach. 

It can include actions such as misconfiguration of security settings, accidentally disclosing sensitive information, or failing to follow proper data handling procedures, resulting in unauthorized access to company data.

‍Example scenario: An engineer at Accounting Co accidentally misconfigures the security settings on the company's cloud storage, exposing sensitive customer data to the internet. This mistake leads to a data breach, resulting in the theft of customer information and triggering costly regulatory fines and legal proceedings.

Risk:  External cyber threat

This occurs when an external actor makes a successful hacking or phishing attempt which leads to a data breach. 

Example scenario: A hacker sends a sophisticated phishing email to employees at US Labs Co, tricking one into revealing their login credentials. Using these credentials, the hacker gains access to the company's internal systems, and updates payment destination wallet addresses to steal outgoing crypto distributions worth millions, leading to significant financial loss and reputational damage for the startup.

Risk: Employee or contractor theft, forgery, or fraud

This scenario involves intentional acts of theft, forgery, or fraud committed by an employee or contractor against the startup. It includes activities such as embezzling funds, forging documents for personal gain, or committing fraudulent transactions that harm the company.

Example scenario: A software developer at Payments Co embezzles $500,000 by creating fake vendor accounts and using their signing credentials to authorize payments to them over several months. The fraud is discovered during an internal audit, causing significant financial and reputational damage to the startup. To address the damages, the founders spend substantial funds on legal fees, forensic accounting services, and implementing more robust internal controls to prevent future fraud.

After you’ve taken a good hard look at the types of risks your crypto startup faces, the next step is to work with an insurance provider that understands the world you operate in to help to keep you protected against the unique challenges of the crypto industry. Your insurance partner team should blend native crypto expertise from individuals long-operating in the space with insurance depth underwriters, claims managers, and brokers who can quickly create tailored solutions that both meet contractual requirements and protect the company from risks like regulatory inquiries, hacks, and fraud. 

The Vouch crypto team has insured more crypto startups in the US than any other firm including Ansible Labs (Beam), Dfns, Mysten Labs (Sui), and Unstoppable Domains. We bring founder, crypto, and insurance experience and expertise to speed up the claims process and provide you the support you need, fast.

What kind of insurance does my crypto company need?

No matter the industry, every startup should have a solid insurance plan to protect against various risks and ensure the business stays on track. These start with what you might call good housekeeping coverages including: 

• Employment Practices Liability: covers legal costs from employee-related claims like discrimination, harassment, or wrongful termination
• Workers’ Compensation: usually required by law and takes care of medical expenses and lost wages if an employee gets injured on the job
• General Liability: typically required to lease office space and shields the startup from claims involving bodily injury, property damage, and advertising injuries
• Business Personal Property: protects the physical assets of the company, like laptops, furniture, and inventory, from damage or loss due to theft, fire, or natural disasters

Now, let’s talk about the coverage policies that address the specific risks for crypto startups outlined in the table above.  

Specific types of insurance policies crypto companies should have:

Directors and Officers (D&O) Insurance

As a crypto startup, you need Directors and Officers (D&O) Insurance to protect your leadership team from personal financial liability. In the often volatile and highly-regulated world of cryptocurrency, members of your executive team can face significant risks, including legal challenges related to regulatory compliance, securities laws, and investor relations. Well-structured D&O Insurance can even protect against regulatory inquiries specific to crypto with legal counsel that has the requisite expertise to help.

D&O Insurance covers legal defense costs, settlements, and judgments, ensuring that the personal assets of your leaders are safeguarded. This protection not only helps you attract and retain top talent by providing peace of mind but also allows your leadership team to focus on driving innovation and growth without the constant fear of personal financial ruin from potential lawsuits.

D&O Insurance was a game-changer for the founders of Ripple during the SEC v. Ripple showdown. It covered the Ripple founders’ legal defense costs and safeguarded their personal assets from the financial fallout. With the SEC coming down hard, accusing Ripple of unregistered securities offerings, this insurance ensured the founders had top-notch legal representation without dipping into their own pockets. This financial shield allowed them to stay focused, lead the company through turbulent times, and tackle the legal battles head-on without risking personal financial ruin.

Cyber Insurance

Your crypto startup also needs cyber insurance to shield against the ever-present risks of cyber attacks and data breaches, including mistakes made by employees or contractors that lead to data breaches such as misconfiguring security settings or accidentally exposing sensitive information like private keys. In the highly-targeted world of cryptocurrency, you're particularly vulnerable to hacking, phishing, and other cyber threats that can cause significant financial losses and damage your reputation. 

Cyber insurance covers the costs associated with these incidents, including legal fees, notification expenses, and recovery efforts. Well-structured cyber for crypto companies can even cover loss of crypto for both the company and its customers. It also provides peace of mind for you and your investors, demonstrating that you're proactive in managing risks and ensuring your business can recover swiftly and continue to thrive after a cyber incident. 

If Mt. Gox had cyber insurance in 2011, it could've been a game-changer when hackers used stolen credentials to transfer Bitcoins. Cyber insurance could have stepped in to cover the costs of the breach — legal fees, forensic investigations, and notifying affected users. It could've also handled the public relations efforts to manage the fallout and restore trust. Most importantly, it would have provided financial compensation for the stolen Bitcoins, softening the blow to the exchange and its users. This would have allowed the founder to focus on rebuilding and strengthening security measures that were needed, instead of being buried under the financial and reputational damage.

Crime Insurance

Crime Insurance is essential for shielding your crypto startup from the myriad forms of criminal activities that can threaten your financial stability. This includes employee, contractor, and third party theft, embezzlement, fraud, and forgery. With Crime Insurance in place, you protect your assets, maintain investor confidence, and ensure your business operates smoothly even in the face of criminal threats. 

Startups that manage, store, or transact crypto have a bigger threat surface than traditional tech startups. The bearer nature of digital assets makes them a more likely target and increases the difficulty in both securing and recovering assets. Well-structured Crime Insurance for crypto companies can cover the loss of crypto and aid in the investigation and recovery processes.

Crime Insurance could have been a critical lifeline for BitMEX in 2020 when the company faced internal fraud allegations. This type of insurance would have provided financial protection against the substantial losses resulting from the alleged withdrawals of millions of dollars by executives, including founder Arthur Hayes, during the regulatory investigation. It would have covered the costs associated with forensic investigations, legal defense, and potential settlements, mitigating the financial impact on the company. By having Crime Insurance, BitMEX could have better navigated the crisis, maintaining investor confidence and focusing on restoring its operations and reputation without bearing the full financial burden of the internal fraud. 

Errors and Omissions (E&O) 

As you grow in the crypto space, you need Errors and Omissions (E&O) Insurance to protect yourself against claims of negligence, product failures, misrepresentation, or breach of warranty. In the competitive and complex world of cryptocurrency, even small mistakes can lead to huge financial losses for your customers and partners, which can result in costly lawsuits for you. 

Think of E&O Insurance as the close cousin of Cyber Insurance. Whereas Cyber Insurance is more focused on financial losses from nefarious acts, E&O Insurance focuses on losses from systems not working as intended. With the Lego block nature of crypto, the E&O Insurance risk surface is significant.

E&O Insurance covers your legal defense costs and any settlements or judgments related to these types of cases, helping to keep your company’s finances and reputation intact. This type of insurance is especially important for startups in the crypto space because of the high-risk nature of the industry as you're often handling sensitive financial data, executing complex transactions, and ensuring compliance with constantly changing regulations. Well-structured E&O Insurance can even cover loss of crypto for both the company and its customers.

One prominent player in the crypto exchange market, Bitfinex, has been involved in several significant lawsuits, primarily related to allegations of market manipulation and misrepresentation. While the crypto exchange maintains the lawsuits are “baseless” and defends its actions vigorously, because these allegations fall under misrepresentation, the legal costs and potential settlements the company will have to pay can be covered by an Errors & Omissions policy.

Together and tailored specifically for your company, these four insurance policies can provide a safety net that helps crypto startups handle potential setbacks, stay focused on the mission at hand, and keep moving forward.

The Vouch solution to cryptocurrency insurance

With a dedicated crypto-native team, extensive crypto-specific policies, and efficient solutions tailored to your team's evolving requirements, Vouch is the leading broker for crypo. Our experts on your side with the information needed to make the best insurance decisions. 

‍Book a meeting with the Vouch crypto team or get a free quote now.