Insurers shun FTX-linked crypto firms as the risk of contagion increases

Dec 19 (Reuters) – Insurers are denying or limiting coverage to customers exposed to bankrupt cryptocurrency exchange FTX, leaving digital currency traders and exchanges uninsured for any losses from hacking, theft or lawsuits, they said stated several market participants.

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

Now, the collapse of FTX last month has amplified the concerns.

Insurance markets specialists Lloyd’s of London (SOLYD.UL) and Bermuda are calling for more transparency from cryptocurrency firms regarding their exposure to FTX. Insurers are also offering broad policy exclusions for any claims arising from the company’s bankruptcy.

Kyle Nichols, chairman of broker Hugh Wood Canada Ltd, said insurers were requiring customers to complete a questionnaire asking whether they had invested in FTX or had any assets on the stock exchange.

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

“Assume the client has 40% of their total assets at FTX that they cannot access, that will be a decline or we will put in place an exclusion limiting coverage for any claims arising from their funds held at FTX,” he said .

Exclusions denying payment for any claims arising from FTX’s bankruptcy are found in insurance policies covering digital asset protection and for the personal liabilities of directors and officers of companies dealing in cryptocurrencies, five insurance sources told Reuters. . A couple of insurers have been pushing for broad policy exclusions for anything related to FTX, one broker said.

The exclusions can act as safety for insurers and will make it even harder for companies to seek coverage, insurers and brokers said.

Bermuda-based cryptocurrency insurer Relm, which has previously provided cover to FTX-linked entities, is taking an even stricter approach.

“If we have to include a cryptographic exclusion or a regulatory exclusion, we simply won’t offer the coverage,” said Relm co-founder Joe Ziolkowski.

D&O QUESTION

Now, one of the most pressing questions is whether insurers will cover the D&O policies of other companies that have had dealings with FTX, given the issues 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 to make investments on behalf of his hedge fund. cryptocurrencies, Alameda Research LLC.

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

D&O policies, used to pay attorney fees, don’t always pay out in the event of fraud.

Insurance sources would not name their customers or potential customers who may be affected by policy changes, citing confidentiality. Crypto companies 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 cryptocurrency market, such as companies owning cold wallets that store assets on non-internet-connected platforms, can get coverage of up to $1 billion, a D&O policyholder’s coverage could now be limited to dozens. million dollars for the rest of the market, Ziolkowski said.

FTX’s collapse will also likely lead to higher insurance rates, particularly in the U.S. D&O market, insurers said. Rates are already high due to perceived risks and a lack of historical data on cryptocurrency insurance losses.

A typical criminal lien, used to protect against losses resulting from a criminal act, would cost $30,000 to $40,000 for a $1 million cover for a digital asset merchant. That compares with a cost of about $5,000 to $1 million for a traditional securities trader, said Nichols of Hugh Wood Canada.

Reporting by Noor Zainab Hussain in Bangalore and Carolyn Cohn in London; Editing by Lananh Nguyen and Anna Driver

Our standards: the Thomson Reuters Trust Principles.

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