Non-fungible tokens are units of data stored on a blockchain, which is an immutable digital ledger for storing information. Proponents of NFTs argue they intrinsically provide proof of ownership. Examples of NFTs include digital artworks, domain names and in-game items.
As a new invention, NFTs are a highly contested area and there are question marks over the veracity of these instruments. People who buy and sell these assets treat them as a unique store of value. However, there is nothing to stop someone creating an identical copy of an existing NFT. There is also very little understanding about how copyright might work in this area.
INSURANCE OPTIONS FOR NFTS
At the moment, there are very limited ways of insuring NFTs. At time of writing, there was no evidence of anyone making a successful claim against a policy written over an NFT.
It’s worth noting some commentators suggest the instruments don’t require cover. This is because NFTs have intrinsic insurance because they cannot be duplicated or stolen unless the NFT’s owner gives a third party their private keys to access them.
There’s only a handful of specialist insurers that cover NFTs, with no appetite for this risk among larger insurers so far. In particular, the increasing incidence of scams involving NFTs are also unpalatable to mainstream insurers.
“Insurers in general are less inclined to provide cover over digital assets, or are only prepared to provide restricted cover,” says Michael White, Steadfast’s broker Technical Manager.
THE FUTURE FOR NFTS AND INSURANCE
NFT educator, adviser and collector Amy Marie Stroud notes this is an area that is still like the wild west, with no legislation or protections.
“There needs to be further education, both for end users and insurers, as there is limited understanding of the NFT sector unless you’re deep in it every day.”
Over time, Stroud expects insurers will be prepared to provide cover over NFTs, especially if asset owners put in place strategies to mitigate their risks. This might include the use of secure cold wallets, which store digital assets offline, as well as air-gapped wallets, which isolate devices where NFTs could be stored from an unsecure network. Digital wallets that require multiple signatures to access their contents are another option.
“Insurers will have to decide how they cover the human element of hackings and phishing scams, which account for most wallet compromises. Insurers may choose to only cover selected projects to reduce their risk,” says Stroud.
“Large scale, custodial marketplaces such as Coinbase NFT are also likely to play a role. Most cryptocurrency investors leave their funds with custodial exchanges such as these, which are usually protected by insurance,” she adds.
While it’s still early days for insurance for NFTs, it’s an area that will grow over time. Talk to your Steadfast broker for advice about cyber insurance and protecting your digital assets.
