The fall of FTX’s crypto empire has pushed insurers to do better background checks before risking their money. It has also made them wary of covering clients with exposure to FTX. The FTX bankruptcy has made insurance markets re-evaluate the enormous amount of risk associated with crypto and are proposing changes to policies to mitigate damages.
While crypto insurance premiums were already high, the FTX saga has made insurers extremely vigilant and they are considering denying insurance to digital currency traders and exchanges.
It has also prompted experts to reevaluate the risk factor and study the finances of other crypto firms.
The FTX Bankruptcy Fallout
Sam Bankman-Fried’s FTX’s collapse has amplified crypto insurers’ concerns, and many are indefinitely delaying or denying coverage to clients with exposure to the beleaguered firm.
Specialists in the Lloyd’s of London and Bermuda insurance markets have adopted a guarded approach and are asking clients for greater transparency about their dealings with FTX.
Ben Davis, lead for digital assets at Superscript, a Lloyd’s of London broker, admitted that his company is giving clients a mandatory questionnaire to fill out to understand the percentage of exposure to FTX.
“Let’s say the client has 40% of their total assets at FTX that they can’t access, that is either going to be a decline or we’re going to put on an exclusion that limits cover for any claims arising out of their funds held on FTX,” Davis told Reuters.
The FTX bankruptcy has exposed a deeply problematic state of doing business in crypto markets and now, insurers are proposing certain policy changes.
Some crypto insurers want to cut off the rotting wound and save what they can. A broker told Reuters that certain insurers are also keen to enact policy changes that will exclude claims related to the FTX collapse.
Bermuda-based crypto insurer Relm, which previously has provided coverage to entities linked to FTX, has decided to do away with crypto exclusions entirely. Relm co-founder Joe Ziolkowski told Reuters that from hereon, for firms seeking crypto or regulatory exclusions, the firm will not offer any coverage.
Insurers were already reluctant to underwrite assets and directors and officers (D&O) protection policies for crypto companies because of scant market regulation and the volatile nature of the cryptocurrency market. D&O policies are not paid in cases of fraud.
US prosecutors and lawmakers allege that former FTX CEO Sam Bankman Fried mismanaged customer funds to pay for expenses and debts incurred by his hedge fund, Alameda Research LLC.
The FTX bankruptcy will definitely lead to higher insurance rates in D&O markets, according to experts.
Binance and the FTX fallout
Binance was scheduled to buy FTX, before pulling out at the last minute citing financial irregularities. The world’s biggest crypto exchange is struggling to retain customer confidence after major withdrawals and a steep drop of its native token shook investor confidence.
The FTX collapse prompted Binance’s founder Changpeng Zhao to admit that the crypt exchange will strive to be completely transparent with its stakeholders.
But recently Reuters’ study of Binance showed that a vast majority of its financial situation remains hidden from the public. Binance has so far not revealed where Binanc.com is based.
Due to lack of regulations, it is not obligated to reveal information about profit, revenue, and cash reserves. The general public also have no idea about its losses or how much money it has in reserve. The recent surge in withdrawals seem to have affected its reserves, but there is no information in the public domain.
Binance’s public filings also cover the bare minimum and there is little to no information on how much money flows in and out of the exchange on a daily basis.
Earlier, Reuters reported that Binance set up its US arm to avoid scrutiny by American regulators. Although Zhao promised transparency, Binance is anything but.
The company is being investigated by the US Justice Department (DOJ) for possible money-laundering and sanctions violations.
Cryptocurrency Regulations
The recent FTX bankruptcy has turned the heat on regulatory bodies, as beleaguered customers demand recompense.
Senator Sherrod Brown (D-Ohio) is the Chair of the Senate Banking, Housing, and Urban Affairs Committee. In an open letter to U.S. Treasury Secretary Janet Yellen, he wrote “FTX’s business model combined three of the most common hazards in financial markets — leverage, illiquid holdings and extreme concentration.” He called for legislation that would give regulators and consumers greater visibility into the activities of crypto firms.
The Senator’s concerns appear valid as the world’s largest crypto exchange has been largely cryptic about its dealings.
The IRS taxes crypto. If you’ve profited off crypto dealings, you have to pay capital gains taxes. However, there are multiple gaps when it comes to crypto regulations.
In the 2022 report made by the Financial Stability Oversight Council, the body mentioned that there are no rules for spot markers, there is regulatory arbitrage, and centralization of services, which fail to lock in risk.
Earlier, the US Securities and Exchange Commission (SEC) argued that crypto must be brought under it as they are “securities.” However, not all cryptocurrencies are securities.
Also, if a crypto is considered a security, developers must file papers with the SEC and follow standard procedure, which can be costly and time-consuming. If the developer refuses to register, they must either claim an exemption or stop selling their tokens to US residents.
Under the IRS, crypto is not considered an investment but a property. This allows for crypto traders to claim losses on their taxes, even if they bought back more for lesser prices. Lawmakers are unhappy with the way crypto traders exploit this loophole and want to bring better clarity.
As of next year, crypto regulations might be modified to make companies comply with banking regulations so that there is uniformity and transparency in their dealings.
Currently, the lack of transparency by crypto exchanges and the volatile nature of the crypto market make it an extremely risky business.
Regulations can have a massive impact on the market as a whole, but as multiple firms collapse or freeze withdrawals, it appears that time has come to tighten the reins.
