NFT Insurance: Challenges, Risks, & Possible Solutions
The world woke up one fine morning in March 2021 to find a digital art being sold at a whopping $ 69 Million.
Had it been done in any other marketplace, the transaction would have been brushed off as sensationalism.
But the sale was consummated at Christie’s Auction House and for a picture found on the internet, no less!
Welcome to the world of Non Fungible Tokens or NFTs! The NFT market is relatively new, but it has already taken the world by storm.
Simply put, NFTs represent ownership of a digital asset that is distinct and unique.
Similar to cryptocurrencies, NFTs are stored in a blockchain, which means that it is decentralized, and therefore, difficult to counterfeit.
To illustrate how blockchains work, whenever a transaction uses cryptocurrencies, computer servers located in different parts of the world go through a series of complicated encryption to authenticate a purchase.
NFTs have indeed revolutionized the digital market.
Pre-NFT era, it was difficult to own an image that could be copied or replicated on the internet. Now, owning a digital token is possible because historical data can be traced.
NFTs use private keys, consisting of long alphanumeric strings, ranging from 12-24 characters or phrases. It may not be totally foolproof, but it certainly puts traceability on the ownership of the digital asset.
Having a badge of ownership makes NFT a valuable asset worth protecting!
Basic Concepts About Insurance
Insurance serves as protection for a policyholder in case of an uncertain event or loss.
It implies that there is a potential risk involved, hence the need to prepare for it when the eventuality happens.
The policyholder pays a premium to an insurance company and gets it back as remuneration when the risk, such as damage or loss, takes place.
So, how is this related to NFTs?
Risks of NFTs
There have been reported cases of “missing NFTs.”
Remember that owning an NFT requires a digital wallet, and one of the risks involved is losing access to your digital wallet.
It can be attributed to any of these common causes such as :
- Forgotten password (yes, we are all guilty of this)
- Damage of devices (also valid and unavoidable)
- Hacking (ever heard of the NFT art heist at Nifty Gateway?). Fraudsters are always lurking on the internet, looking for loopholes and stealing passwords whenever the opportunity strikes.
Other risks associated with NFTs include:
- Broken link to the storage location of the digital asset
- Closing down of digital wallet companies, storage location, or marketplace service provider
- The creator of the digital asset does not have intellectual property rights, copyright, or trademark.
With these potential risks and the amount of media exposure NFTs are getting, securing insurance for these valuable tokens requires some SERIOUS consideration.
After paying a substantial amount for your non fungible token, it makes a lot of sense to set aside a couple of bucks for an insurance premium in case your NFT goes missing.
But another challenge comes in, how do you put value to a digital asset, such as NFTs?
Challenges in Putting Value to Non Fungible Tokens
Insurance provides coverage for physical loss or damage to property.
But how do they cover a digital art form that is intangible, erratic, and can easily pop out of existence in cyberspace?
Typically, the value of an asset such as fine art is computed using the purchase price, market price, and projected replacement cost or declared value based on the regular appraisal.
Insurance coverage for fine art presupposes that the owner would like to pass the fine art to future generations.
With NFTs, values fluctuate at such a fast pace that it is difficult to forecast trends (and crashes). Insurers would naturally want some semblance of predictability.
Are NFTs Insurable?
Yes, NFTs are insurable. In fact, some NFT marketplace players like Coinbase offer crime insurance in case of cryptocurrency loss in their storage system.
NOTE: This excludes security breaches arising from your personal log-in credentials.
Not all players in the NFT marketplace offer crypto insurance, though. Be sure to be vigilant and evaluate marketplaces to see how they fit with your risk appetite
At the early stages of digital assets, the insurance industry has not yet fully embraced the coverage of NFTs.
This is simply because it doesn’t have the “law of large numbers” yet that actuarial scientists need to come up with a proper valuation, clear-cut guidelines on premiums, inclusions and exclusions, and payout schemes for insurance claims.
It still requires disruption and a lot of thinking out of the box. But knowing that this is a highly lucrative market, who knows?
Maybe tomorrow we will wake up and find it already in order!