Insurers shun FTX-linked crypto firms as contagion risk mounts
FTX logo and representation of cryptocurrencies
Sun, December 18, 2022
By Noor Zainab Hussain and Carolyn Cohn
(Reuters) - 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.
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.
Now, the collapse of FTX last month has amplified concerns.
Specialists in the Lloyd's of London and Bermuda insurance markets are requiring more transparency from crypto companies about their exposure to FTX. The insurers are also proposing broad policy exclusions for any claims arising from the company's collapse.
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.
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.
Bermuda-based crypto insurer Relm, which previously has provided coverage to entities linked to FTX, takes an even stricter approach.
"If we have to include a crypto exclusion or a regulatory exclusion, we're just not going to offer the coverage," said Relm co-founder Joe Ziolkowski.
D&O QUESTION
Now, one of the most pressing questions is whether insurers will cover D&O policies at other companies that had dealings with FTX, given the problems facing exchange's leadership, Ziolkowski said.
U.S. prosecutors say former FTX Chief Executive Officer Sam Bankman-Fried engaged in a scheme to defraud FTX's customers by misappropriating their deposits to pay for expenses and debts and to make investments on behalf of his crypto hedge fund, Alameda Research LLC.
A lawyer for Bankman-Fried said on Tuesday his client is considering all of his legal options.
D&O policies, which are used to pay legal costs, do not always pay out in cases of fraud.
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, neither of which responded to e-mails seeking comment.
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, Ziolkowski said.
The FTX collapse will also likely lead to a rise in insurance rates, especially in the U.S. D&O market, insurers said. The rates are already high because of the perceived risks and lack of historical data on cryptocurrency insurance losses.
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.
(Reporting by Noor Zainab Hussain in Bengaluru and Carolyn Cohn in London; Editing by Lananh Nguyen and Anna Driver)
OUT OF THE FIRE INTO THE FRYING PAN
This 26-year-old FTX customer lost access to $14,000 when Sam Bankman-Fried's exchange collapsed. Now he plans to keep his money in stocks.
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Phil Rosen
Mon, December 19, 2022
Daniil Pemberton, 26, lost access to about $14,000 in the collapse of FTX.
Daniil Pemberton
In an interview with Insider, Daniil Pemberton said the collapse of FTX has rattled his trust in companies within crypto sector.
The 26-year-old lost access to about $14,000 in his FTX account, which included bitcoin and ether.
Moving forward, he plans to stick to stocks and index funds.
On November 8, when Daniil Pemberton saw headlines on the collapse of Sam Bankman-Fried's crypto exchange, he tried to transfer funds out of his FTX account. He soon realized that wouldn't be possible.
Based in the Netherlands, the 26-year-old graduate student said he had 1.25 ether and 0.64 bitcoin saved on his account, which at the time were worth about $13,825 all together.
When he tried to initiate a withdrawal, the app showed the transaction was pending, but nothing happened beyond that. When Pemberton checked the cryptocurrency wallet addresses he tried to send the money to, his balance remained at zero. Insider has reviewed these documents.
"The tech itself, the crypto, seems fine, but the problem is the institutions around it," Pemberton told Insider. "They are the ones who undermine the trust, because at any point a platform could make a bad decision, which leads them to becoming bankrupt, and everyone loses. There's no safety net."
FTX filed for bankruptcy on November 11, and Bankman-Fried stepped down as CEO. The Securities and Exchange Commission has since alleged that he orchestrated a years-long scheme to defraud investors.
The new chief executive, John Ray III, has said that FTX had haphazard accounting and that there was "no record keeping whatsoever." FTX also reportedly transferred billions of dollars in customer funds to Bankman-Fried's Alameda crypto hedge fund.
"I lost faith in the companies within crypto," Pemberton said. "I'm skeptical on who to entrust with my funds."
While it's possible FTX users can recoup some of their funds during bankruptcy proceedings, experts warn it could months or years — if at all.
Pemberton said one of the main reasons he chose FTX to store his cryptocurrency was that everyone seemed to praise it, including many finance influencers on YouTube that he followed.
"The New York Times had wrote about Sam Bankman-Fried, and so did other prestigious publications and individuals. I thought surely they did their research and wouldn't praise him without due diligence," Pemberton noted.
He also found the promise of FTX's high interest-rate payments appealing, and that they remained high during a time when other platforms were giving lower yields on investments. "In retrospect it was a dumb decision. I had gotten greedy."
Pivoting to traditional investments
In the implosion of FTX, Pemberton said he lost approximately 60% of his total portfolio, including stocks and holdings across other exchanges, including Binance. Moving forward, he plans to put more weight in traditional equities.
"I'm going to pivot more to stocks," he said. "Stocks have more policies in place in case something goes wrong."
Johnson & Johnson, Coca-Cola, and the Vanguard S&P 500 ETF are all on his list as stable, long-term investments, Pemberton said.
"This whole thing shocked me so much that I don't want any more volatility. I'll invest in more index funds and bonds too."
In an interview with Insider, Daniil Pemberton said the collapse of FTX has rattled his trust in companies within crypto sector.
The 26-year-old lost access to about $14,000 in his FTX account, which included bitcoin and ether.
Moving forward, he plans to stick to stocks and index funds.
On November 8, when Daniil Pemberton saw headlines on the collapse of Sam Bankman-Fried's crypto exchange, he tried to transfer funds out of his FTX account. He soon realized that wouldn't be possible.
Based in the Netherlands, the 26-year-old graduate student said he had 1.25 ether and 0.64 bitcoin saved on his account, which at the time were worth about $13,825 all together.
When he tried to initiate a withdrawal, the app showed the transaction was pending, but nothing happened beyond that. When Pemberton checked the cryptocurrency wallet addresses he tried to send the money to, his balance remained at zero. Insider has reviewed these documents.
"The tech itself, the crypto, seems fine, but the problem is the institutions around it," Pemberton told Insider. "They are the ones who undermine the trust, because at any point a platform could make a bad decision, which leads them to becoming bankrupt, and everyone loses. There's no safety net."
FTX filed for bankruptcy on November 11, and Bankman-Fried stepped down as CEO. The Securities and Exchange Commission has since alleged that he orchestrated a years-long scheme to defraud investors.
The new chief executive, John Ray III, has said that FTX had haphazard accounting and that there was "no record keeping whatsoever." FTX also reportedly transferred billions of dollars in customer funds to Bankman-Fried's Alameda crypto hedge fund.
"I lost faith in the companies within crypto," Pemberton said. "I'm skeptical on who to entrust with my funds."
While it's possible FTX users can recoup some of their funds during bankruptcy proceedings, experts warn it could months or years — if at all.
Pemberton said one of the main reasons he chose FTX to store his cryptocurrency was that everyone seemed to praise it, including many finance influencers on YouTube that he followed.
"The New York Times had wrote about Sam Bankman-Fried, and so did other prestigious publications and individuals. I thought surely they did their research and wouldn't praise him without due diligence," Pemberton noted.
He also found the promise of FTX's high interest-rate payments appealing, and that they remained high during a time when other platforms were giving lower yields on investments. "In retrospect it was a dumb decision. I had gotten greedy."
Pivoting to traditional investments
In the implosion of FTX, Pemberton said he lost approximately 60% of his total portfolio, including stocks and holdings across other exchanges, including Binance. Moving forward, he plans to put more weight in traditional equities.
"I'm going to pivot more to stocks," he said. "Stocks have more policies in place in case something goes wrong."
Johnson & Johnson, Coca-Cola, and the Vanguard S&P 500 ETF are all on his list as stable, long-term investments, Pemberton said.
"This whole thing shocked me so much that I don't want any more volatility. I'll invest in more index funds and bonds too."
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