Cryptocurrency carries many caveats, some as a result of misconceptions and criminal associations.
The biggest barrier to mass adoption remains confidence in the security of digital currency, therefore cryptocurrency exchange Gemini is launching captive insurance company Nakamoto, providing meaningful custody insurance coverage and setting the standard in this space.
Gemini allows customers and clients to buy, sell and store crypto assets. However, as a result, exchanges and custodians are all a major target for hackers because of the billions of dollars in crypto that is held by them. Theft of crypto assets reached $480 million in the first half of last year.
The market value of cryptocurrency rose 25x between 2016 and 2019 reaching $300 billion and will continue to fluctuate, but hackers will also continue to infiltrate. Gemini have leveraged this opportunity for insurance.
As the world’s first captive insurance company to insure crypto custody – licensed by the Bermuda Monetary Authority (BMA) – Nakamoto will provide Gemini Custody assets $200 million in coverage, which is the largest limit purchased by any crypto custodian in the world for offline and segregated custody.
This provides insurers like Aon and Marsh the confidence to underwrite a substantive amount of insurance.
Yusuf Hussain, Head of Risk at Gemini, highlights to Forbes that they recognized a gap and went on to partner with two of the largest insurance brokers to solve this problem.
“In traditional finance, most banks have captive insurers set up for a variety of reasons, including cost savings. The nuance that is specific to the crypto industry is that there is a lack of coverage.
“The captive is a mechanism by which we can continue to build the crypto ecosystem by providing the incentive for additional capacity. This is important because the headlines of the past focused on catastrophic losses from unregulated exchanges, which has led to a level of hesitance to traditional insurers in underwriting the space,” Hussain explains.
He adds that there is also not enough data to model the risks involved appropriately and compares this to the emergence and subsequent evolution of cyber risk insurance in the early 2000s.
“There was not enough lost data but as that lost data continued to be built, more and more insurers came on board and started to understand the risks better. This is why we decided to go down the route of a captive, because who better than the crypto industry to understand the risks of crypto and provide sufficient, adequate capacity,” Hussain says.
Gemini and Aon have incorporated Nakamoto in Bermuda, the leading captive insurance jurisdiction to tap into reinsurance and gain access to greater amounts of insurance capacity, while Marsh has brokered excess commercial insurance to provide a strong product.
Hussain discusses how “Aon and Marsh needed a level of comfort in order to provide a significant capacity and help us establish a captive. We were able to demonstrate this to them within our vision, show how compliant we are and how we’re looking to grow the crypto ecosystem.”
Gemini Custody has been approved by the New York State Department of Financial Services (NYDFS) and is SOC 2 Type 1 compliant, which Hussain says is “in alignment with the company’s goal of being deregulated, the most compliant and the most secure crypto exchange and custodian.”
Having founded the company with his twin Tyler in 2014, President of Gemini Cameron Winklevoss says of the news: “Insurance is one of the main barriers to crypto mass adoption. Gemini has created a captive insurance company to address this. Obtaining meaningful insurance in the crypto industry remains a challenge, and our captive will help to increase our insurance capacity and move the industry forward.”
Gemini also offers insurance for customer crypto held in its online connected Hot Wallet, which was procured via Aon in 2018.