Insurers shun FTX-linked crypto firms as contagion risk mounts

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Dec 19 (Reuters) — Insur­ers are deny­ing or lim­it­ing cov­er­age to clients with expo­sure to bank­rupt cryp­to exchange FTX, leav­ing dig­i­tal cur­ren­cy traders and exchanges unin­sured for any loss­es from hacks, theft or law­suits, sev­er­al mar­ket par­tic­i­pants said.

Insur­ers were already reluc­tant to under­write asset and direc­tors and offi­cers (D&O) pro­tec­tion poli­cies for cryp­to com­pa­nies because of scant mar­ket reg­u­la­tion and the volatile prices of Bit­coin and oth­er cryptocurrencies.

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

Spe­cial­ists in the Lloy­d’s of Lon­don (SOLYD.UL) and Bermu­da insur­ance mar­kets are requir­ing more trans­paren­cy from cryp­to com­pa­nies about their expo­sure to FTX. The 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 requir­ing clients to fill out a ques­tion­naire ask­ing whether they invest­ed in FTX, or had assets on the exchange.

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

“Let’s say the client has 40% of their total assets at FTX that they can’t access, that is either going to be a decline or we’re going to put on an exclu­sion that lim­its cov­er for any claims aris­ing out of their funds held on FTX,” he said.

The exclu­sions deny­ing pay­out for any claims aris­ing out of the FTX bank­rupt­cy are 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, five insur­ance sources told Reuters. A cou­ple of insur­ers have been push­ing for a broad exclu­sion to poli­cies for any­thing relat­ed to FTX, a bro­ker said.

Exclu­sions may act as a fail­safe for insur­ers, and will make it even more dif­fi­cult for com­pa­nies that are seek­ing cov­er­age, insur­ers and bro­kers said.

Bermu­da-based cryp­to insur­er Relm, which pre­vi­ous­ly has 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,” said Relm co-founder Joe Ziolkowski.

D&O QUESTION

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

U.S. pros­e­cu­tors say for­mer FTX Chief Exec­u­tive Offi­cer Sam Bankman-Fried engaged in a scheme to defraud FTX’s cus­tomers by mis­ap­pro­pri­at­ing their deposits to pay for expens­es and debts and to make invest­ments on behalf of his cryp­to hedge fund, Alame­da Research LLC.

A lawyer for Bankman-Fried said on Tues­day his client is con­sid­er­ing all of his legal options.

D&O poli­cies, which are used to pay legal costs, do not always pay out in cas­es of fraud.

Insur­ance sources would not name their clients or poten­tial clients that could be affect­ed by pol­i­cy changes, cit­ing con­fi­den­tial­i­ty. Cryp­to firms with finan­cial expo­sure to FTX include Binance, a cryp­to exchange, and Gen­e­sis, a cryp­to lender, nei­ther of which respond­ed to e‑mails seek­ing comment.

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 get cov­er for up to $1 bil­lion, a D&O insur­ance pol­i­cy­hold­er’s cov­er may now be lim­it­ed to tens of mil­lions of dol­lars for the rest of the mar­ket, Ziolkows­ki said.

The FTX col­lapse will also like­ly lead to a rise in insur­ance rates, espe­cial­ly in the U.S. D&O mar­ket, insur­ers said. The rates are already high because of the per­ceived risks and lack of his­tor­i­cal data on cryp­tocur­ren­cy insur­ance losses.

A typ­i­cal crime bond — used to pro­tect against loss­es result­ing from a crim­i­nal act — would cost $30,000 to $40,000 per $1 mil­lion of cov­er­age for a dig­i­tal assets trad­er. That com­pares with a cost of about $5,000 per $1 mil­lion for a tra­di­tion­al secu­ri­ties trad­er, Hugh Wood Canada’s Nichols said.

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

Our Stan­dards: The Thom­son Reuters Trust Principles.

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