Insurers shun FTX-linked crypto firms as contagion risk mounts

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

Insurers were already reluctant to underwrite asset and directors and officers (D&O) protection policies for crypto companies due to weak market regulation and the price volatility of Bitcoin and other cryptocurrencies.

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

Insurance market specialists Lloyd’s of London (SOLYD.UL) and Bermuda are demanding more transparency from crypto companies regarding their exposure to FTX. Insurers also offer broad policy exclusions for any claims arising from business collapse.

Kyle Nichols, president of brokerage Hugh Wood Canada Ltd, said insurers were asking clients to complete a questionnaire asking whether they had invested in FTX or had any assets on the exchange.

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

“Let’s say the client has 40% of their total assets at FTX that they can’t access, that will either be a drop or we’ll put in place an exclusion that limits coverage for any claims arising from their funds held on FTX” , did he declare.

Exclusions denying payment of any claims arising from FTX’s bankruptcy are in insurance policies that cover digital asset protection and for personal liabilities of directors and officers of companies that deal in crypto, five sources said. insurance at Reuters. A few insurers have pushed for a broad policy exclusion for anything FTX-related, a broker said.

The exclusions can act as a fail-safe for insurers and will make it even harder for businesses to seek coverage, insurers and brokers said.

Relm, the Bermuda-based crypto insurer that previously covered FTX-related entities, 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 Relm co-founder Joe Ziolkowski.

D&O ISSUE

Now, one of the most pressing questions is whether insurers will cover D&O policies from other companies that have had dealings with FTX, given the issues facing exchange executives, Ziolkowski said.

US prosecutors say former FTX CEO Sam Bankman-Fried engaged in a scheme to defraud FTX customers by misappropriating their deposits to pay expenses and debts and to make investments on behalf of of his crypto hedge fund, Alameda Research LLC.

A Bankman-Fried attorney said Tuesday his client is considering all of his legal options.

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

Insurance sources would not name their customers or potential customers who may be affected by the policy changes, citing confidentiality. Crypto firms with financial exposure to FTX include Binance, a crypto exchange, and Genesis, a crypto lender, which did not respond to emails seeking comment.

While the less risky parts of the crypto market, such as companies that have cold wallets storing assets on non-internet-connected platforms, can be covered up to $1 billion, the coverage of a D&O policyholder can now be limited to tens of millions of dollars for the rest of the market, Ziolkowski said.

The collapse of FTX will also likely drive up insurance rates, particularly in the US 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 bond — used to protect against losses from criminal act — would cost between $30,000 and $40,000 per million dollars of coverage for a digital asset trader. That compares to a cost of about $5,000 per million for a traditional securities trader, said Nichols of Hugh Wood Canada.

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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