How does Coincover’s new consumer-grade cryptocurrency insurance work?
Digital asset insurance has typically been for exchanges and institutional custody services. That could be changing.
Cryptocurrency has become synonymous with cybersecurity issues. That's why insurance for digital assets has so far been mostly reserved for institutional cold (offline) wallets, which can theoretically be secured against just about everything except an inside job. Institutional cold wallets are about as well-secured as cryptocurrency can get.
Everyday consumer hot (online) wallets are the opposite end of the risk spectrum. Short of holding funds on a shady exchange, this is probably about as unsafe as cryptocurrency holdings get.
There's always someone falling victim to SIM swapping, fat-fingering a destination address, losing their seed phrase, misplacing their back-up device, chatting up a Nigerian prince and otherwise looking for the next exciting way of losing lots of money. There's also the fact that cryptocurrency is so volatile. How do you ensure appropriate coverage when the value of the insured assets is constantly changing?
Coincover aims to solve these problems. It's a cryptocurrency service provider, backed by insurance giant Lloyds. In what may be a world first, it's offering a more "consumer-grade" flavour of cryptocurrency insurance.
The maximum level of coverage is GBP£100,000 of cryptocurrency, while the minimum tier offers coverage up to GBP£10,000.
Simply put, if you lose your cryptocurrency, you can get paid the fiat currency value of the lost crypto... within reason.
One simple trick
The first thing to note is that you can't just slap this coverage onto any wallet. It has to be a BitGo wallet, and you need to select Coincover as a backup key holder to get the full range of services. If the funds are not in a BitGo wallet, they are not insured.
This is because BitGo is a multisignature wallet provider. This means you, BitGo and Coincover each hold a fragment of the private key. You initiate transactions with your part of the key, BitGo co-signs transactions with its half and Coincover holds a back-up copy of the keys in safe storage.
This makes certain services and coverage types possible.
For example, if you're unexpectedly yanked from the mortal coil while in possession of a large amount of cryptocurrency, Coincover and BitGo can jointly use their keys to ensure your crypto can be unlocked and passed on according to your will or whatever laws will govern the handover in the absence of a will.
Plus, the need for BitGo to co-sign transactions can also make it safer to offer other types of coverage because it means BitGo has a chance to secure funds as well as try to recover them by doing things like notifying exchanges that they've received stolen funds.
Terms and conditions apply
There are also many of the terms and conditions you'll find with most insurance. For example, you're only covered up to the maximum limits of your coverage, and you won't get fully reimbursed for a million-dollar loss if you only have $1,000 of coverage. Your policy also needs to be up to date, and you'll need to file a police report to make a theft claim.
Other restrictions are more specific to crypto. For example, this insurance only covers BTC, BCH, BSV, XRP, XLM, DASH, ZEC, LTC, and ETH plus a certain selection of ERC20 tokens.
It also explicitly does not cover "failure, breakdown or disruption of the cryptocurrency blockchain", so don't count on being covered in the unlikely event you fall victim to a 51% double spend attack.
Naturally, it also doesn't cover the loss of funds that you deliberately sent to someone else, with the possible exception of funds sent after falling victim to a $5 wrench attack.
The most pressing terms and conditions, which are perhaps the most likely to result in claims being denied, are around one's obligations to practice adequate security. Per the terms, customers are solely responsible for practicing adequate security, which includes keeping their password secure and not sharing it with anyone else, not recording passwords in plain text format and not using the wallet on any devices that don't meet minimum security requirements.
These minimum security requirements include updating computer software regularly, not using an unsupported operating system, installing security software, scheduling routine antivirus scans and/or seeing an IT professional to have the computer fully inspected for any kinds of malware or other problems.
"Should your account be compromised as a result of your failure to comply with this paragraph we shall not be responsible for any losses suffered by you," the terms and conditions say.
The policy can cover cryptocurrency lost to phishing attacks and malicious software, but following the terms and conditions seems like a pretty good way to avoid becoming a victim.
On the whole, it looks like Coincover and BitGo are delivering an excellent example of how to make cryptocurrency more consumer friendly and how useful multisignature wallets can be to this end.
You're still not covered for a market crash though.
"We do not accept any liability for any reduction in the value of your digital currency when stored within our Services," Coincover reminds us.
Disclosure: The author holds BNB and BTC at the time of writing.