Insurers Deny Coverage to Crypto Firms with Exposure to Bankrupt FTX Exchange

2 - 3 minute read

As the crypto market continues to grow and evolve, insurance companies are finding it increasingly difficult to provide coverage for digital currency traders and exchanges. One of the main reasons for this is the lack of regulation in the market, as well as the volatile prices of cryptocurrencies like Bitcoin.

But the recent collapse of FTX, a crypto exchange, has further complicated matters. Insurers are now requiring more transparency from crypto companies about their exposure to FTX, and are proposing broad policy exclusions for any claims arising from the company’s bankruptcy. For example, Lloyd’s of London broker Superscript is giving clients that dealt with FTX a mandatory questionnaire to outline the percentage of their exposure, and exclusions denying payout for any claims arising out of the FTX bankruptcy are being found in insurance policies that cover the protection of digital assets and for personal liabilities of directors and officers of companies that deal in crypto.

Bermuda-based crypto insurer Relm is taking 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,” said co-founder Joe Ziolkowski.

One of the most pressing questions now is whether insurers will cover D&O policies at other companies that had dealings with FTX, given the problems facing the exchange’s leadership. U.S. prosecutors have accused former FTX CEO Sam Bankman-Fried of engaging in a scheme to defraud FTX’s customers. D&O policies, which are used to pay legal costs, may not always pay out in cases of fraud.

The exclusions and lack of coverage being proposed by insurers may act as a failsafe for the companies, but they will make it even more difficult for crypto firms seeking coverage. While the least risky parts of the crypto market, such as companies that own cold wallets storing assets on platforms not connected to the internet, may be able to get coverage for up to $1 billion, a D&O insurance policyholder’s cover may now be limited to tens of millions of dollars.

This lack of coverage could have serious consequences for crypto firms, as they will have no protection against losses from hacks, theft, or lawsuits. It is important for these companies to find ways to mitigate their risks and secure coverage, as the crypto market continues to mature and become more mainstream.

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