Insurers Follow Auditor in Shunning Crypto Companies

In Brief

• Insurers are becoming more reluctant to provide their services to crypto companies.
• Many insurers have had to adjust policies in light of client firms’ association with FTX and its collapse.
• Earlier this week, Binance said the Big Four accounting companies would not work with it, after losing the services of Mazars.

Insurers are increasingly denying or significantly limiting coverage to clients involved with cryptocurrencies due to the collapse of exchange FTX.

Inconsistent regulation and volatile crypto prices have already made insurers wary of covering crypto companies. Fewer will now be willing to underwrite asset and directors and officers (D&O) protection policies for these firms, in light of the FTX collapse.

Questions Asked About Dealings with FTX
Different insurers have started taking specific approaches to companies that have had exposure to FTX. One has required that clients fill out a questionnaire regarding their relation to the bankrupt exchange. These include questions of whether they invested in FTX, or held assets on the exchange.

Lloyd’s of London broker Superscript is also insisting on a similar questionnaire for FTX-exposed companies. A bit more sophisticated, they use it to outline the percentage of their client’s exposure. Ben Davis, digital assets lead at Superscript, hypothesized about the fate of a firm with 40% of assets on FTX. He said it would either be a decline, or would put on an exclusion, limiting coverage for FTX fund claims.

Lloyd’s of London and Bermuda specialists are also requiring FTX-exposed firms to provide greater transparency. Their insurers are also proposing broad policy exclusions for any claims arising from the company’s collapse. Other insurers insist on a broad exclusion to policies for anything related to FTX. Reuters sources claimed exclusions denying payout for claims derived from the FTX bankruptcy are found in crypto companies’ insurance policies.

Will Insurers Pay Out?
Given the issues with FTX’s leadership, some wonder whether insurers will cover D&O policies at affiliated firms. D&O policies are generally used to pay legal fees in the case of a lawsuit. However, in cases of fraud, which FTX could prove to be, these policies do not always pay out.

According to one expert, the most financially robust crypto companies could potentially manage to receive coverage up to $1 billion. At this point, for the rest of the market, the cover from a D&O insurance policy could be limited to mere tens of millions of dollars.

D&O rates for crypto companies had already been relatively high, naturally because of the perceived risk. However, a lack of historical data on cryptocurrency insurance losses has also become a glaring issue, given these recent upheavals.

First Auditors, Now Insurers
Insurers aren’t the only financial market participants finding it increasingly precarious to work with crypto companies. Earlier this week, Deloitte, Ernst & Young, KPMG, and PwC said they would not work with Binance to audit its proof-of-reserves.

The world’s largest cryptocurrency exchange reported that the Big Four accounting firms said they are “currently unwilling” to perform such an audit for a private cryptocurrency company.

While these companies have said they would not take on any further such work, they neglected to comment on whether they would discontinue services for other cryptocurrency clients. For instance, Deloitte has a long history with U.S. crypto exchange Coinbase.

Binance had sought the services of these companies after accounting company Mazars Group suspended all work with cryptocurrency clients. In the wake of FTX, auditors have become increasingly wary of becoming embroiled in potential regulatory debacles.

Disclaimer
BeInCrypto has reached out to company or individual involved in the story to get an official statement about the recent developments, but it has yet to hear back.