5 Reasons Why the Crypto Insurance Market Could Reach New Heights in 2021

The global digital asset market continues to grow at a fast clip, a trend that is likely to continue for years to come. With more organizations and governments exploring the opportunities presented by digital assets and increased regulatory clarity, there is expected to be a greater focus on insurance in 2021.

1. More Regulatory Clarity

Digital assets are not a new phenomenon, having been around for several years. Yet many established companies, including large financial institutions and government entities, have historically seemed reluctant to adopt digital assets. 

At least a part of this reluctance can be attributed to the still developing regulatory landscape, but this is quickly changing. In January, the Office of the Comptroller of the Currency (OCC) granted a national trust bank charter to a South Dakota chartered trust company, making it the first federally chartered digital asset bank in the US and allowing it to partner with other traditional financial institutions to offer digital currencies to customers. Earlier that month, the OCC issued guidance that allows national banks and federal savings associations to participate in independent node verification networks and use stablecoins — cryptocurrency backed by another asset — for payment activities. This comes on the heels of two separate letters of guidance issued last year in which the OCC clarified that national banks can offer cryptocurrency custody services to clients and hold deposits that serve as a reserve against currency-backed stablecoins.

The Securities and Exchange Commission (SEC) has similarly taken action on cryptocurrency. In a December statement, the agency clarified how broker-dealers must operate when acting as custodians of digital asset securities in order to avoid enforcement action. 

This regulatory progress enables traditional financial institutions to adopt digital currencies and is expected to pave the way for even greater investment in the digital asset space. Reassured by the growing regulatory framework, other organizations that have been exploring the benefits of cryptocurrency are likely to take steps to invest in this field. And according to many observers, it’s just a matter of time before the asset class becomes mainstream.

A more developed regulatory framework should also help make traditional insurers more willing to provide insurance capacity in this space. At this time, however, more education is still needed. And as the regulatory environment continues to evolve, the heightened risk of regulatory activity makes it incredibly important for companies and their directors and officers to understand what, if any, risk transfer options are available to help mitigate potential exposure.

2. Increased Adoption of Digital Assets

The COVID-19 pandemic has forced major digital transformation upon almost all organizations, and has highlighted the value of digital assets. Aided by this — as well as increased regulatory clarity — cryptocurrency is quickly moving beyond the niche market it was historically. Many banks are exploring and investing in digital asset projects, with some even creating their own digital currency. 

Although most traditional banks were waiting for the green light from regulators before publicly adopting digital assets, they had been watching the market and preparing internally for several years. Now that the regulatory framework is being built — and there is recognition that the crypto market is here to stay — organizations are increasingly incentivized to explore these opportunities. More traditional entities could announce substantial investments in this field in the coming months, and while they likely have insurance coverage in place, they should carry out detailed reviews of their existing policies to ensure that digital assets don’t fall outside the scope of coverage.

3. Growth of Decentralized Finance

Decentralized finance (DeFi) — financial applications operating on smart contracts and without centralized governmental or company control — exploded in 2020, with billions in total value locked, and will likely continue to expand in 2021. 

Although historically focused on a retail customer base, DeFi will likely start concentrating on ways to attract institutional involvement over the next 12 months. With the change in administration, regulators may also seek to better understand the DeFi space. 

From a risk perspective, traditional insurance coverages that insure against technology failures and directors and officers liability (D&O) is always valuable for businesses interested in protecting both their balance sheet and the individuals running the company. While DeFi companies tend to differ substantially from each other, making it challenging at times to find a one-size-fits-all approach, there are creative insurance solutions that can be borne out of the DeFi boom. 

4. Surge in Bitcoin Value 

Bitcoin might have started 2020 as a fringe investment, but by the end of the year, the 11-year-old currency had quadrupled in value. Higher pricing of Bitcoin and other digital assets will invariably affect the insurance market. As the value of digital assets goes up, those holding the assets — whether institutions or individuals — tend to feel an increased need for insurance protection. And as their value grows, more “traditional” financial companies are increasing their investment in digital assets either for their own investment purposes or on behalf of their clients. As more individuals or companies invest in digital assets, the demand for insurance protection will escalate. 

The traditional insurance market continues to slowly become comfortable with digital assets, although it remains cautious. As the market continues to evolve in this space, it is important for those holding, or working with, digital assets to speak with experienced insurance advisors to obtain guidance on the best products available to transfer risk.

5. More Corporate Transactions 

If there was any doubt before, recent announcements about crypto-focused companies going public indicate that the industry is on a growth trajectory. While going public — whether through a traditional initial public offering (IPO), a direct listing, or a special purpose acquisition company (SPAC) — can offer many financial benefits, it also adds significant exposures, which will require specific insurance solutions to protect owners and investors. 

Merger and acquisition (M&A) activity in the blockchain/digital asset space is also expected to grow. The total value of crypto mergers and acquisitions in the first half of 2020 reached a record $597 million, surpassing the total from 2019, with the average deal size more than doubling. We expect to continue to see this upward trajectory in 2021. Increased regulatory guidance continues to make it more acceptable for traditional financial institutions to accelerate their expansion into digital asset-related activities. This is likely to lead to traditional financial firms starting to acquire crypto-focused companies, such as custodians and technology companies, as additions to their portfolio of offerings. This will lead to more investments continuing to flow into the space. 

M&A activity brings with it a set of exposures that can be addressed and mitigated through multiple solutions, including D&O and transactional risk insurance products.

With an increase in regulatory clarity and greater adoption of digital assets by more traditional financial institutions, interest in digital assets will likely continue to grow. To date, insurance markets’ willingness to freely underwrite this space has not kept up with the demand for insurance. But as the growth continues, we expect a shift in supply over the next few years. Companies working with digital assets should understand their specific risk exposures, how they can be transferred, and the right insurance partners for their business.

For more information on Marsh's Digital Asset Risk Transfer (DART) solutions, click here or fill out the "more information" form on the right.