The recent security breach at WazirX, which led to the theft of over $230 million, has sparked a broader conversation within the crypto industry about the necessity of protecting customers’ assets. As a response, other cryptocurrency exchanges are exploring measures to secure wallets and provide reparations to affected clients. However, experts argue that traditional insurance solutions for digital assets are fraught with challenges, casting a shadow over efforts to ensure comprehensive protection in the sector.

The WazirX incident has highlighted the pressing need for robust protective mechanisms within the crypto industry. According to Nischal Shetty, CEO of WazirX, obtaining insurance for crypto assets remains a significant hurdle. “I don’t think there is any exchange that can claim that the funds are 100 percent insured. We tried to get insurance in the past, but we did not find a provider willing to insure these assets. It’s not an easy process,” Shetty told Business Standard.

In response to the growing concerns, CoinSwitch, another prominent crypto exchange, has taken steps to secure its custodial wallets. Balaji Srihari, CoinSwitch’s business head, stated, “We store users’ crypto assets in industry-leading custodial wallets designed with advanced security measures to prevent unauthorized access or theft. Our custodial wallets are insured by reputed providers, offering an additional layer of protection.”

Despite such efforts, the broader industry struggles with the challenge of securing comprehensive insurance coverage. The lack of regulatory requirements for mandatory insurance and the evolving nature of the crypto sector have created significant obstacles. Navodaya Singh Rajpurohit, a legal partner at Coinque Consulting, highlighted the issues surrounding insurance for virtual digital assets (VDAs): “The lack of growth in India’s VDA insurance sector is due to regulatory uncertainty and the absence of mandates requiring exchanges to insure the assets in their custody.”

The classification ambiguity of digital assets like Bitcoin, security tokens, and stablecoins further complicates risk assessment for insurers. This uncertainty impacts how insurers price these risks and tailor coverage to meet the unique needs of the crypto industry. Rajpurohit noted, “Ambiguity in classifying digital assets complicates risk assessment. Without clear guidelines, insurers are unsure how to price these risks.”

The rapid evolution of the crypto sector also adds to the complexity. “Insurers need to understand best practices for the industry, which are evolving frequently. The sector is new, and incidents occur regularly, making it challenging for providers to underwrite,” Shetty explained.

Globally, the situation is no different. In 2022, crypto exchanges faced unprecedented levels of hacking, with $3.8 billion stolen from cryptocurrency businesses, according to Chainanalysis. Some global insurance providers, like Lloyd’s in the UK, offer policies tailored to protect cryptocurrencies stored in online wallets. These policies have dynamic limits that adjust with the value of the crypto assets and cover losses from digital thefts.

As the industry grapples with these challenges, the need for clear regulatory frameworks and innovative insurance solutions becomes increasingly apparent. Until then, exchanges and customers alike must navigate a landscape where traditional insurance models struggle to keep pace with the rapid advancements and risks inherent in the world of cryptocurrency.