Insurers Nix FTX-Linked Crypto Firms; Contagion Razes Industry

Insurers are denying or limiting coverage to clients with exposure to bankrupt crypto exchange FTX, leaving digital currency traders and exchanges uninsured for any losses from hacks, theft or lawsuits, several market participants said, Noor Zainab Hussain and Carolyn Cohn reported for Reuters.

Photo Insert: Crypto firms with financial exposure to FTX include Binance, a crypto exchange, and Genesis, a crypto lender, did not respond to e-mails seeking comment.

The exclusions denying payout for any claims arising out of the FTX bankruptcy are found in insurance policies that cover the protection of digital assets and for personal liabilities of directors and officers of companies that deal in crypto, five insurance sources told Reuters.

A couple of insurers have been pushing for a broad exclusion to policies for anything related to FTX, a broker said. Exclusions may act as a failsafe for insurers, and will make it even more difficult for companies that are seeking coverage, insurers and brokers said.

Insurers were already reluctant to underwrite asset and directors and officers (D&O) protection policies for crypto companies because of scant market regulation and the volatile prices of Bitcoin and other cryptocurrencies.

Kyle Nichols, president of broker Hugh Wood Canada Ltd, said insurers were requiring clients to fill out a questionnaire asking whether they invested in FTX, or had assets on the exchange. Lloyd's of London broker Superscript is giving clients that dealt with FTX a mandatory questionnaire to outline the percentage of their exposure, said Ben Davis, lead for digital assets at Superscript.

"Let's say the client has 40% of their total assets at FTX that they can't access, that is either going to be a decline or we're going to put on an exclusion that limits cover for any claims arising out of their funds held on FTX," he said.

Insurance sources would not name their clients or potential clients that could be affected by policy changes, citing confidentiality. Crypto firms with financial exposure to FTX include Binance, a crypto exchange, and Genesis, a crypto lender, did not respond to e-mails seeking comment.

The FTX collapse will lead to a rise in insurance rates, especially in the US D&O market, insurers said. The rates are already high because of the perceived risks. A typical crime bond -- used to protect against losses resulting from a criminal act -- would cost $30,000 to $40,000 per $1 million of coverage for a digital assets trader.

That compares with a cost of about $5,000 per $1 million for a traditional securities trader, Hugh Wood Canada's Nichols said.

While the least risky parts of the crypto market, such as companies that own cold wallets storing assets on platforms not connected to the internet, may get cover for up to $1 billion, a D&O insurance policyholder's cover may now be limited to tens of millions of dollars for the rest of the market.

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