US Crypto Giant Coinbase Details $255 Million Customer Insurance Coverage Program

Coinbase is taking the threat of criminals hacking activity seriously, and to prove it, the exchange revealed the details of its crypto insurance policy program this week.

It’s held a hot wallet policy with a $255 million limit since 2013. The policy is facilitated through Lloyd’s of London.

In a post about its insurance, the exchange’s Chief Information Security Officer, Philip Martin, stated:

The data is clear that, today, the most likely consumer loss scenario for any cryptocurrency company is hot wallet loss due to hacking.

Worst Case Scenarios Covered

Coinbase’s insurance policies give its customers some peace of mind that the cryptos they hold at the exchange are protected from losses.

Martin wrote:

“If the worst happens and Coinbase loses customer funds, customers deserve certainty that they will be made whole.”

The worst case scenarios for losses are broken down into two categories: Crime and Specie. Crime covers losses caused by criminals who hack, steal, and conduct fraudulent transfers. Insider trading losses are also covered.

If there is physical damage or theft of private key data in cold storage, the Specie coverage kicks in.

Martin explained:

“Crime policies would not generally cover the costs of incident response, PR costs, etc. Crime policies also don’t generally cover failures of the underlying currency (e.g. 51% attacks). Coverage for hot wallet exposures are also significantly more expensive than cover for cold storage alone.”

Coinbase’s Advice For Crypto Companies

Martin had plenty to say about how much insurance a crypto company should have, and what it should cover. He found that there is “an unfortunate amount of misinformation in industry marketing material around insurance.”

Coinbase’s view is:

Companies should focus on insurance for value in flight. This means that exchanges and wallets should have sufficient Crime coverage to fully cover their hot wallets (including enough buffer to handle asset price spikes).

The goal should be to have enough Crime insurance to cover normal outbound customer transaction sizes. At the very least, there should be enough insurance to cover whatever assets are programmatically accessible if they’re not using cold storage, Martin said.

Martin also addresses giving preferential treatment to specific customers on policies that are meant to cover all customers. This is commonly known as First Loss Payee status on a specific policy.

While we firmly believe that the future of cryptocurrency insurance is per-customer policies, we do not believe that assigning first loss payee status on what should be a policy meant to benefit all customers is the right way to get there.

Still More Work To Do

Martin said Coinbase is working with regulators and insurers to create more insurance solutions.

A specific area that Coinbase wants to address relates to bull markets. Martin pointed out that challenges can stem from how the policies are structured. They are denominated in fiat. However, the assets are in crypto.

Martin said:

This means that in bull markets it can be challenging for companies looking to grow insurance policy limits at the same pace as asset prices are moving. Insurers need to hold digital assets in order to offer policy limits denominated in cryptocurrency to avoid differences in valuation.

Coinbase’s reveal shows it is in line with other crypto players. For example, CCN reported that BitGo, a crypto custodian backed by Goldman Sachs, is offering up to $100 million in insurance coverage for cold-wallet assets through Lloyd’s. There is no additional cost to BitGo clients.