Cryptocurrency lacks the same protection as traditional banking when it comes down to losing funds due to hacks or fraud.
Traditional banking offers packages which allows accountholders to recoup at least some of their losses, but underwriting the pitfalls of cryptocurrency investment as yet hasn’t been widely adopted by insurers.
Exchanges are increasing security in order to protect investors’ funds though. Cold storage is reputedly the safest way of storing cryptocurrency today, particularly for major high-profile investors. Typically, smaller investors continue to store their funds in offline wallets or paper wallets with access to a public and private key. Safeguarding funds is now of paramount concern following major hacking incidents around the world after cryptocurrencies started gaining enough prominence to challenge fiat currencies.
Hacking attacks have seen more than USD 2 billion either stolen or mislaid. Security is the main issue with hot wallet storage which is why larger exchanges keep the majority of their funds in cold storage with a tiny percentage in hot wallets for instant withdrawal.
In Asia where hackings are more frequent, getting any kind of protection is all but impossible. Henri Arslanian, the Fintech & Crypto leader for PwC Asia commented:
“Most institutionally minded crypto firms want to buy proper insurance, and in many cases, getting adequate insurance coverage is a regulatory or legal requirement. However, getting such coverage is almost impossible despite their best efforts.”
A recent Reuters report indicated that despite the greatest efforts of some of the major exchanges to protect client assets, safeguarding funds will never be complete with insurers coming to the party:
“Getting the buy-in from insurers would mark an important step in crypto industry efforts to show that it has solved the problem of storing digital assets safely following the reputational damage of a series of thefts, and allow it to attract investment from mainstream asset managers.”
The combination of insurance and cold storage as a completely failsafe method of protection of users’ crypto assets will become a major factor impacting the widespread adoption of cryptocurrencies moving forward, according to Hoi Tak Leung, a Senior Lawyer at Ashurst’s Digital Economy Practice, who argues:
“Institutional investors who are interested in investing in crypto will have various requirements, including reliable custody and risk management arrangements. Insufficient insurance coverage, particularly in a volatile industry such as crypto, will be a significant impediment to greater ‘institutionalization’ of crypto investments.”
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