FTX loss claims payouts triggered by freezes of investors withdrawals

Insurers have been developing applications using blockchain, but until recently, carriers had rarely offered coverage for cryptocurrency or decentralized finance losses.

That is starting to change. Claims following the collapse of the FTX cryptocurrency exchange in November, paid by insurers InsurAce and Nexus Mutual, weren't fulfilled on the basis of lost value, but because the insureds were left unable to use their crypto keys to withdraw their digital currency from a custodian, explained Tom Power, senior vice president in the financial lines practice at CAC Specialty, an insurance risk solutions provider. 

"All of these appear to have fairly binary triggers without a whole lot of discretion or need for a tremendous amount of claims analysis or proof of loss," he said. 

InsurAce policyholders who had its Custodian Risk Cover product for FTX received over $40,000 in payouts, that the decentralized blockchain-based protection service announced on March 1. Nexus Mutual, which provided its Custody Cover product, paid out nearly $5 million to policyholders in February.

InsurAce's and Nexus' custody risk coverages are commonly called insurance but in fact are decentralized finance services triggered in parametric fashion by covered events, according to Power. The coverages are mutualized, and participants in these mutual structures vote on whether to cover certain risks. "They have different controls around the types of investments that those pools can be put into, to ensure that they are available for policyholders in the event of a claim," Power said.

Both the InsurAce and Nexus compensations had waiting periods of 90 days following the event, in this case, FTX's failure. At that point, those who suffered losses had to file claims including confirmation that they could not recoup their assets. FTX's freezing of investors' withdrawal keys triggered the compensation contracts, and as Power said, it would not have mattered if the freeze was caused by a hack or other reasons.

InsurAce had previously paid on claims about the April cyberattack that exploited price manipulation vulnerability for Elephant Money, and the May de-pegging of $UST cryptocurrency from stablecoins, which are supposed to be fixed in value compared to a stable asset such as government-issued fiat money, or exchange-traded commodities.

Nexus Mutual also has paid claims for previous incidents. These include $5 million for the hack of the Rari Capital Fuse market.