Why Is It So Hard To Insure NFTs?
According to the Insurance Information Institute, insurance is now a $1.3 trillion industry. We have insurance for our cars, our homes, our jobs, and even our teeth. Heidi Klum insures her legs, Gene Simmons insures his tongue, and a 500-year-old hotel in England once insured its staff against ghost attacks.
So, where’s the NFT insurance? After all, there’s clearly a market for it.
NFT sales are expected to grow by $147 billion by 2026, and several recent high-profile heists have highlighted the need for additional protection. Victims like Seth Green, gallery owner Todd Kramer, and the Bored Ape Yacht Club itself would surely purchase insurance were it offered.
And yet, even the pioneering companies who gave us cryptocurrency insurance — namely Lloyd’s, Coincover, and Breach — are scratching their heads regarding protecting NFTs.
So why is that? How come we can insure art and cryptocurrency but not NFTs? And were a policy to exist, would it actually be effective? Or would it be about as helpful as poltergeist insurance?
Let’s investigate NFT insurance!
The Short Version
- In light of several recent high-profile NFT heists, talk of NFT insurance — and its necessity — is rising.
- However, while crypto insurance already exists, NFT insurance is magnitudes more difficult to offer.
- Challenges like appraisals, risk assessments, fraud prevention, lack of regulatory protection, and how to cover the various forms of NFT theft all cause providers to scratch their heads.
- But as always, where traditional methods fail, a decentralized blockchain algorithm may have the answer.
The Current State of Crypto Insurance
To better understand why NFT insurance is so hard to pull off, let’s look at the state of crypto insurance.
To make up for the lack of FDIC protection, Coinbase revealed in a blog post that they have a “hot wallet” policy for $255 million worth of coverage that protects user funds from a widespread hack (but not phishing).
In March 2020, Lloyd’s revealed the market’s first private crypto insurance policy, designed in conjunction with Coincover. For as little as £1,000, you could protect yourself against “losses arising from the theft of cryptocurrency held in online, hot wallets.”
Coincover has since added down market options for less hardcore HODLers:
Coincover’s Theft Protection Promise covers all Coincover policies: “If someone steals your funds using an attack our tech is designed to prevent, we are well placed to compensate you because we've insured our technology with Lloyd's of London.”
In February 2022, Coincover rival Breach Insurance announced Crypto Shield, a product designed to emulate FDIC insurance for crypto held on major exchanges.
With a solid A.M. Best rating of A-, Crypto Shield also covers up to 50% appreciation of your stolen crypto’s value during the claims process. It’s a nice touch and surely something that the victims of the 2014 Mt. Gox hack would’ve loved to have.
Anyway, it seems logical that any provider willing to insure crypto stored in a hot wallet could also protect the NFTs in there, too. I mean, it’s the same private key, either way. Unfortunately, that doesn’t seem to be the case. Coincover even lists it as their #1 FAQ.
So why won't the big crypto-insurance providers insure NFTs? Is it because they’re too new? Or is there something else at play?
Read more >>> What Is FDIC Insurance? How Can It Protect My Accounts?
Why Is Insuring NFTs So Difficult?
Insuring an NFT is very complicated. To underwrite a policy, insurance companies need to understand:
- What they’re covering;
- How much it’s worth;
- How likely they are to receive a claim;
- How to defend themselves from insurance fraud, and;
- The overall regulatory landscape governing the industry and how it’s insured
For NFTs, all five items are complicated to determine.
When you wreck your car, your insurance adjuster will look at the current market value (CMV) of the vehicle to determine the number on your check.
Even fine art can be properly appraised. “In a regular fine art insurance policy, you can use the sales figure or purchase price as an option for how to value the work,” says Mary Pontillo, SVP and National Fine Arts Practice Leader for Risk Strategies in Insurance Business Magazine. She goes on to say that the price of NFTs is constantly in flux; the high peaks and low valleys mean that underwriters have a more challenging time assigning value to the digital assets.
Take, for example, the Jack Dorsey Tweet NFT. The current owner paid $2.9 million. However, he firmly believes it's now worth $48 million. But he only received bids up to $23,660, so how much would his claim be worth in the event of a theft?
“The most prominent challenge for the emerging NFT insurance sector is the problem of the valuation of NFTs.” writes Turkish research group Gökçe. “As NFTs are non fungible, there is no market price similar to the way cryptocurrencies may be evaluated.”
When Holly and I bought our new house, my auto insurance premiums shot up by 15%. According to my provider, it’s because we moved into a higher-risk area.
This example illustrates how insurance providers have finely-tuned algorithms that can calculate the risk of insuring an asset-based on hundreds, if not thousands, of factors. But for NFTs, those models don’t exist yet, and they’d be highly resource-intensive to build.
Once you’ve sold your first NFT insurance policies, how would you prevent your policyholders from committing insurance fraud? For example, they could claim they were the victim of “phishing,” when in reality, they sent their $600,000 NFT to their other hot wallet.
Unchecked fraud is skyrocketing in the crypto and NFT world, with $14 billion worth of digital assets stolen in 2021 alone. That’s 516% higher than in 2020.
And while certified crypto fraud investigators do exist (like Hudson Intelligence), they may not exist on the scale necessary to regulate an entire NFT insurance industry.
Read more >>> How to Spot a Crypto Scam
Uncertain Regulatory Landscape
Ever since the McCarran-Ferguson Act of 1945, the insurance industry has been regulated by the states where it does business. State insurance departments collect taxes from them, oversee their market conduct, and, when necessary, try to save them from insolvency.
Biden’s March 2022 crypto executive order displayed impressive forward-thinking; however, there was no mention of the burgeoning crypto or NFT insurance space. “Consumer protections” were mentioned, but mainly regarding protecting private data or preventing fraud — not claim payouts.
That leaves crypto and NFT insurance providers in an unregulated, uncertain space. Will they be ordered to shut down like Salvasen Health for selling unlicensed insurance products? Will a state guaranty fund save them from the brink of insolvency after a tidal wave of (possibly fraudulent) claims?
Like a self-appointed deputy in the Wild West, NFT insurance providers may be left wondering what will happen if and when the law finally arrives.
Ambiguity Surrounding Exactly What To Protect Against
According to Sharon Henley, VP of R&D at Coincover, her company is actively working towards an NFT insurance product.
However, one of the surprising questions they’ll have to ask policyholders is, “Which aspect of your NFT do you want to protect?”
“What are you buying protection for? Just the token? For the validity of the metadata? For the authentication of the JPEG?” she wrote in an email exchange with Motley Fool.
Her questions highlight all the things that can happen to an NFT beyond theft. Your NFT could be proven fake, the artist proven a fake, the metadata scrambled, the token lost in the migration from Ethereum 1.0 to 2.0, and more.
The task of creating an à la carte “menu” of NFT insurance options may be more of a hurdle than a barrier, but it exists nonetheless.
Are There Any NFT Insurance Policies out There?
At the time of this writing, there are no commercially-available NFT insurance policies. But given the velocity of the blockchain industry, this could change tomorrow.
In addition to Coincover, Nexus Mutual is one of the more promising candidates for the first bonafide NFT insurance product. The seven-person team has devised a clever, blockchain-based solution to digital asset insurance they call Smart Contract Cover.
“Smart Contract Cover is not a contract of insurance. Fellow members will decide on claims. Claims payments are enforced by token-driven economic incentives rather than placing trust in an insurance company,” says the Nexus Mutual website.
In their white paper, they describe a time before insurance when communities would pool resources to protect individuals from the risks they all faced. Smart Contract Cover would return to that system. The concept isn’t perfect, but it’s promising. And blockchain-based insurance, in general, may break through like a British Mark IV tank.
When It Comes, Would Buying NFT Insurance Be Worth It?
Despite the challenges, NFT insurance is inevitable. Demand is high, and the market is wide open. So, when it arrives, should you buy some to protect your NFTs?
Well, if you ask me, the two best forms of NFT insurance are:
- A cold wallet
Learn to spot an NFT scam, vet your purchases with extreme scrutiny, and finally, stick your private keys in a cold wallet like a Ledger.
Chances are you won’t be trading NFTs daily, so sticking your cold wallet in a safe will offer less expensive and similar — if not superior — protection than early forms of NFT insurance.
Read more >>> How to Spot an NFT Scam
The Bottom Line
Due to their non-fungible nature, the difficulty of appraisal, rampant fraud, and more, NFTs are notoriously difficult to insure. Companies are trying, but a viable commercial solution may not arrive anytime soon.
In the meantime, the best NFT insurance you have is your own caution and alertness paired with a reputable cold wallet.
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