Japanese insurance giant Mitsui Sumitomo Insurance, as revealed by Nikkei Asian Review, will be launching insurance coverage for cryptocurrency exchanges, designed to insure against damages and losses resulting from cyber attacks and operational issues.
The new insurance product is being developed in partnership with Tokyo-based bitcoin exchange bitFlyer, aimed at protecting both exchanges and their customers against losses. The coverage will range from ¥10 million to ¥1 billion and will insure against hacks and other unauthorized accesses as well as operational errors, such as mistakes or embezzlement by exchange employees.
The insurance premium for the policy will be calculated based on the cryptocurrency exchange’s revenue numbers and will lie between several hundred thousand to several million Japanese Yen.
Bitcoin exchanges have a long history of being targeted by cyber criminals. As large bitcoin exchanges hold millions of dollars worth of cryptocurrencies in users’ wallets they are a very popular target for hackers looking to steal user funds. The most recent example of a large exchange that has been hacked is Bitfinex. Bitfinex was hacked on August 2, 2016, which resulted in a loss of $64 million worth of cryptocurrency. Japan, itself, has also witnessed a major bitcoin exchange hack when the once largest bitcoin exchange Mt.Gox declared bankruptcy in 2014 after it fell victim to cyber theft.
This will be the first insurance policy of its kind in Japan and will most likely be welcomed by digital currency exchanges. In particular, smaller exchanges can benefit from purchasing this type of insurance coverage, as just a single hack or an operational deficiency can easily mean the end of an exchange if it cannot generate enough trading commission revenue to cover the losses and the drop in business due to reputational damage.
The largest Japanese bitcoin exchange bitFlyer has a monthly trading volume of around ¥100 billion. Most of its local peers, on the other hand, experience substantially lower transaction volumes. However, one single cyber attack could end up costing an exchange several billion yen. Hence, an insurance policy safeguarding exchanges against losses resulting from cyber attacks could end up becoming a lifesaver for smaller exchanges in Japan.
Purchasing this insurance policy could, therefore, add a further level of security to cryptocurrency exchanges provided that it would ensure that all stolen funds could be recuperated in the form of an insurance policy payout. This, in turn, could lead to an increase in Japanese investors entering the cryptocurrency space, as exchanges would become safer for consumers to trade and to temporarily store cryptocurrency. In fact, the Tokyo-based market research company Seed Planning is predicting that Yen-denominated bitcoin transactions will quadruple over the course of the next year.
If this new insurance policy becomes standard for Japanese exchanges and its government and regulators continue to be supportive of bitcoin, Japan could potentially emerge as one of the biggest cryptocurrency trading hubs in the world and overcome the negative sentiment resulting from the infamous Mt.Gox scandal.