Hunton Insurance Recovery Blog

Crypto markets are experiencing the greatest crash in their history to date. The value of a Bitcoin (BTC) has plummeted 70% from its peak and Ethereum (ETH) has fallen 77%. Since last November, the value of cryptocurrency tokens has lost $2 billion in value.^[1] As noted financial publication Barron’s put it: “Crypto is having a ‘Lehman moment,’ a shattering of confidence triggered by plunging asset prices, liquidity freezing up, and billions of dollars wiped out in a few scary weeks.”^[2] Cryptocurrency companies are halting withdrawals and transfers, platforms are seizing up, and regulators are circling.^[3]

Nor has the devastation been limited to the coins themselves. Non-fungible token (NFT) sales have reduced by 90% since September 2021.^[4] The New York Times reported that Opensea.io (OpenSea), an NFT marketplace that receives 2.5% share of the proceeds for each NFT sale, has been plagued by “a surge of plagiarism, as sellers convert traditional artwork into NFTs and then list the images for sale without compensating the original creator.”^[5] For example, DeviantArt, an artist collective that scans OpenSea for copyright infringement of the work of its artists, found 290,000 instances of unauthorized NFTs copying its artists’ works.^[6] While infringing listings can be deleted in response to take down requests filed by the artist, buyers of counterfeit NFTs are rarely given a refund. 

Against this backdrop, the issue of whether there may be claims associated with cryptocurrency and NFTs is far from a theoretical or esoteric thought exercise. It is very real. And when there are claims, businesses and investors doubtless will look to their insurers.

A business or home is devastated by a wildfire. Property insurance is available up to limits. A home is broken into, and art and jewelry are stolen. Crime/specie insurance is available. 

But what about new age assets? What about cryptocurrency? What about NFTs? These obviously are not immune from theft by hackers. In 2021, hackers stole at least $3.2 billion in cryptocurrency with schemes short of outright theft accounting for another $7.8 billion.^[7] In the first four months of 2022, NFT hacks accounted for $52 million in losses, an almost eight-fold increase from 2021.^[8]

There typically is a significant time lag between the development of a product and the availability of product-specific insurance. This general proposition applies with equal force here. Over the course of a decade, the marketplace for cryptocurrency has increased from zero to an estimated $250 billion. However, only $6 billion in insurance coverage is currently available. It would be a gross understatement to say that there is a truly remarkable imbalance between market value and insurance capacity. 

Although NFTs have been around for the better part of a decade, it was only during the last two years that the marketplace has grown to upwards of $41 billion.^[9] In addition to its newness, NFTs pose additional risks for insurers, including questions of ownership, authenticity and the valuation of a truly “unique” asset. Consequently, availability of insurance coverage for NFTs is even further behind.  

Given the rapid rate at which the digital asset field is developing, and claims are emerging, and the insurance industry’s attempts to specifically address coverage for these losses and claims, anything written on this topic will, at least in part, be outdated by the time it is published. The objective of this article is to educate the reader on the history and status of the field, enabling them to ask the questions they need to ask, and to procure the coverage they need if available now or in coming months.

In a six-part series delving into issues relating to insurance coverage for digital assets, the Hunton insurance group provides a comprehensive understanding of the types of loss that can be sustained, who can sustain them, the availability of coverage under traditional insurance policies, and the emergence of new insurance products. The following issues will be addressed:

• Part One: Overview and Review of Key Terminology
• Part Two: Who Can Incur Losses With Digital Assets and What Are the Potential Risks of Loss and Liability Related to Digital Assets 
• Part Three: How Traditional Insurance Products Can Help Protect Policyholders From Loss and Liability Related to Digital Assets
• Part Four: History of Insurance Coverage Specifically Designed for Cryptocurrency
• Part Five: How Companies and Consumers With Cryptocurrency Risk Approach Insurance
• Part Six: Brokers and Cryptocurrency Insurance
• Part Seven: Insurance for NFTs 

In this first post in the series, we provide an overview of key terminology. 

Like many areas, the field of digital assets has its own unique jargon. A brief refresher follows.

• What is blockchain? A blockchain is a decentralized, publicly distributed, digital ledger consisting of records called “blocks” that are used to record transactions.
• What is cryptocurrency? A cryptocurrency is a digital form of money. Unlike physical money, cryptocurrencies are not created, regulated or issued by governments or other financial institutions (i.e., the Federal Reserve). Instead, they are created and secured online through “cryptographic” algorithms with a decentralized network of computers validating and maintaining the transactions. Bitcoin is the biggest and most well-known while others, like Ethereum, have emerged. 
• What is a cryptocurrency exchange? An exchange is a digital marketplace where cryptocurrencies can be traded. Different exchanges have different options and features. 
• What is an NFT? An NFT, or “non-fungible token,” is a non-interchangeable or unique and authenticated unit of data stored on a blockchain. Types of NFT data units may be associated with digital files such as images of art, photos, music, film and games.
• What is a wallet? Digital assets may be secured offline or online. Storage offline on a piece of hardware akin to a USB drive is referred to as a “cold wallet.” In contrast, a “hot wallet” is maintained in a digital form online. Like a PIN number at a bank account, a hot wallet is accessed through a private digital key.

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This is the first post in the Blog’s Digital Asset Insurance Coverage series.

This post is an excerpt from an article written by Scott DeVries, Jessica Cohen-Nowak and Adriana Perez that originally appeared in the Journal on Emerging Issues in Litigation published by Fastcase Full Court Press, Volume 2, Number 4 (Fall 2022), pp. 255 – 276 (a comprehensive list of all references is provided in the published journal version).  

[1] Joe Light, Crypto Winter Could Become Crypto Hell, Barron’s (June 20, 2022). 

[2] Id.

[3] The White House, Executive Order on Ensuring Responsible Development of Digital Assets (Mar. 9, 2022), https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/.

[4] David Yaffe-Bellany, Thefts, Fraud and Lawsuits at the World’s Biggest NFT Marketplace, N.Y. Times (June 6, 2022).

[5] Id.

[6] Id.

[7] Aaron M. Lane, Crypto theft is on the rise. Here’s how the crimes are committed, and how you can protect yourself, The Conversation (Feb. 3, 2022, 12:59 AM EST), https://theconversation.com/crypto-theft-is-on-the-rise-heres-how-the-crimes-are-committed-and-how-you-can-protect-yourself-176027.

[8] Losses from NFT crimes up 667% in 2022 compared to whole of 2021: Report, mint (May 9, 2022, 06:01 PM IST) https://www.livemint.com/market/cryptocurrency/losses-from-nft-crimes-up-667-in-2022-compared-to-whole-of-2021-report-11652099260806.html.

[9] NFT Insurance Is Coming, but Is There an Industry to Support It?, PYMNTS.com (Mar. 3, 2022), https://www.pymnts.com/nfts/2022/nft-insurance-is-coming-but-is-there-an-industry-to-support-it.