Getting NFT insurance: Covering a new asset class is a big deal.
It’s possible that when David MacNeil bought a Ferrari 250 GTO for $70 million in 2018, he also got it insured. It turns out that when Vignesh Sundaresan paid $69 million for a piece of digital art in the form of an NFT in March of this year, no one was going to insure it.
In the first three months of 2021, more than $2 billion worth of NFT (non-fungible token) sales were made. Insurers who are looking for new business should be excited by the protection gap this leaves. It’s not yet clear if the insurance industry is ready to take on this new type of investment.
What is NFT?
An NFT, or non-fungible token, is a type of digital asset that is based on a blockchain, which is a shared ledger. An NFT is a digital asset that can’t be bought or sold.
It’s the most common type of digital asset out there right now: cryptocurrency, which is what Bitcoin is. It means that every unit of cryptocurrency has the same value. This is called “fungibility.” No one Bitcoin is worth more or less than another Bitcoin, just like a dollar bill.
NFTs, on the other hand, are not fungible. Each token is unique and can’t be used again. In this way, they can be used as proof of ownership for things like digital art.
One of Sundaresan’s NFTs, worth $69 million, is a digital collage made by the artist Beeple. It was sold at auction house Christie’s. He sold his first tweet as an NFT for $2.9 million. NFTs can be bought and sold for as little as $5 to hundreds of thousands of dollars in a large and active market. These examples are just a small part of that market.
The NFTs aren’t true for everyone. But some people think this is just the start of a big change that will give artists a new way to sell their work.
Risk of NFT
The value of NFTs is likely to change for a while, just like the value of cryptocurrency. It’s not just that the value of your NFT will go down. There are also other risks to owning an NFT.
Some NFTs have “gone missing,” which means that a broken link has made what the NFT represented go away. Imagine that you bought a painting and then the frame was empty.
People lose access to their digital wallets when they forget their passwords or their devices get broken. NFT users who used the NFT marketplace Nifty Gateway lost thousands of dollars in an account hacking attack. After cryptocurrency exchanges were set up in 2011, more than $11 billion worth of money was stolen.
These losses are getting a lot of attention from the media, and as people become more aware of the risks of digital assets, NFT owners will want to protect them with insurance.
The insurance sector
Insurers and insurtechs cover some digital assets, but they only cover fungible tokens like cryptocurrency, not non-fungible tokens like NFTs. It’s possible to cover a small amount of money, but the total value of cryptocurrencies recently hit $2 trillion.
InsTech London has released a new report called “Demystifying crypto: the insurance opportunities and challenges.” This report looks into the insurance opportunities and challenges of crypto coverage in more detail.
Many insurers have been wary of insuring digital assets because they don’t have enough information about them. It’s hard to fully understand and price the risk. Underwriters usually get a diversification benefit from physical assets, but the risks of digital assets leave them at risk. So, most of the biggest cryptocurrency policies are backed by several Lloyd’s of London syndicates rather than a single insurer, so this is how it works.
It’s a bigger problem when it comes to insurance for NFTs because the NFT market is still very new. Also, the market moves a lot, which adds to the problem: how can the payout be calculated for a loss of something that is so vague in a volatile market?
Outside of the insurance industry, new ways to protect NFTs are coming up. New, blockchain-based, peer-to-peer networks are using a decentralized model to let a group decide how to price risk. This creates a “prediction market” in economic theory, where people trade the outcome of events in order to predict true probabilities. This helps solve the problems of not having enough data and volatility in value.
Nexus Mutual, Cover Protocol, Insured Finance, and Tidal Finance are some of the companies in this field. They protect smart contracts, which are used to buy and sell NFTs, by giving them a safe place. If something goes wrong with the smart contract and there is a loss, someone files a claim. But the peer-to-peer model on the blockchain could theoretically cover any kind of risk, and these companies have plans for more than just digital. It looks like Nexus Mutual is going to start selling earthquake insurance. Cover Protocol says its goal is to be a place where you can buy insurance for “anything.”
Embedded products and safety
People who own digital assets already make decisions about risk when they choose where to store their assets. It makes sense for storage wallet providers and digital marketplaces to compete on security features, which makes them good partners for risk management providers. Integrating coverage into asset storage platforms also gives you the chance to take steps to reduce the risk of accidents.
CoinCover, an insurtech company that was started in 2018 with help from members of the Lloyd’s Product Innovation Facility, like Atrium, TMK, and Markel, has made its product available on a number of wallet platforms. It has a cryptocurrency insurance product that stores back-up keys offline and adds extra security features like facial recognition. BitGo, a digital marketplace and wallet platform for fungible tokens, now has its own insurance with a capacity of $700 million, which is backed by Lloyd’s. This insurance is also backed by BitGo.
Insured Finance and Tidal Finance have both announced that they will work with NFT marketplaces to offer insurance to NFT buyers at the time of purchase. Insured Finance also plans to offer a “insured storage vault” product for NFTs. The security features of the vault aren’t clear.
When it comes to insuring digital assets, there are a lot of things we don’t know. As long as NFTs are worth as much as antique cars, there will be a market for NFT insurance. While the insurance industry isn’t very excited about decentralized risk management platforms, they are becoming more popular. It might be a good idea for insurance companies to get in on this market early so that they can get ahead of the rest. All this means is that when MacNeil’s Ferrari first came out in 1963, it cost $18,000. That’s 3900 times less than it costs now.