Bitcoin security specialist BitGo has announced a new partnership with Innovation Insurance Group and XL Group that will enable it to offer $250,000 in theft insurance to customers who opt in to the program.
The coverage will protect BitGo's web wallet and platform API clients from errors resulting from its technology, processes or employee actions, as well as external hacking incidents and employee theft. Those who want to increase the value of their protection can also do so for a 1% annual fee.
Long associated with some of the more prominent evangelists behind multi-signature security, BitGo CEO Will O’Brien indicated that, for his team, the policy will help answer an outstanding customer concern, namely, what happens if the firm's own technology is compromised?
O’Brien told CoinDesk:
“The last piece is what happens if that service provider, even if they’re holding only one key, is compromised. We see it in our enterprise customers that are building sizable bitcoin businesses, those that have auditors or fund administrators. We see that those types of customers are saying, ‘How can I get an extra guarantee from BitGo?’”
Perhaps most interesting for the industry at large is the involvement of Innovation Insurance Group CEO Ty Sagalow in the deal.
A 30-year veteran of the insurance industry and 25-year veteran of AIG eBusiness Risk Solutions, Sagalow is credited with developing foundational tech insurance policies, such as cyberinsurance and reputation insurance, as well as other innovative offerings like Y2K insurance.
Sagalow indicated it didn’t take him long to see a similarity between the now-nascent bitcoin industry and the tech sector in 1999, and that he believes that his partnership with BitGo will represent a similarly historic moment.
“I think this is a watershed event, not just for the bitcoin industry, but the insurance industry. A number of carriers are going to have to reevaluate the bitcoin community,” Sagalow said.
O’Brien went on to clarify that the offering does not mean BitGo is reselling insurance, but rather its policy is just another way the company is limiting the liability of its customers, bolstering its claims through backing by an outside party.
“BitGo is insured and our customers are getting this comprehensive and scalable service through BitGo,” O’Brien said.
Limited early offerings
O’Brien further sought to differentiate his company’s insurance from others in the bitcoin space that he criticized as being less comprehensive and more for publicity purposes.
“If you look back at the history of insurance in bitcoin, a lot of this has been a marketing stunt,” he said. “Insurance that is protecting against crime, specifically the on-site theft of private keys by employees, it’s such a narrow definition of insurance. It’s more than likely never going to be the incident that causes the breach, theft or loss.”
The CEO went on to suggest that while such policies were appropriate for “bitcoin’s formative years”, his company’s offering would better meet the industry’s needs.
Sagalow added that the policy includes both new and customized elements of past insurance policies, including some parts of technology professional liability insurance, which protects against programming errors, and business interruption insurance.
“Whether you’re stealing a private key or social security number, you’re still stealing an electronic file. Bitcoin theft is fundamentally a cyber risk – there are elements of crime, there are elements of professional liability – so it’s a series of types of coverages put together in a new format and applied to a whole new industry,” Sagalow explained.
Bitcoin's image problem
Though optimistic that the partnership will send a wider message, Sagalow attested to the ongoing challenges bitcoin is facing in the insurance industry.
For example, Sagalow explained that to many insurance professionals, bitcoin is still synonymous with online black markets such as Silk Road.
“When I started talking to underwriters and carriers, a number of them said ‘Isn’t that the industry that’s involved in drugs and murder for hire, is that the industry you want us to start insuring?’” he said.
Still, Sagalow indicated that he believes “the greatest risk is not taking one”, a factor that lead him to embrace the challenge of insuring a company in the industry on behalf of XL Group.
He further applauded the bitcoin industry for the steps it has taken to distance itself from such illicit activities, comparing it favorably to the gambling industry in Nevada.
“I think of the casino industry,” he continued. “In the 1950s and 1960s, the Nevada casinos were owned by the mob, but that wasn't a permanent situation, eventually companies took over that industry. That happened in bitcoin, not in decades, but in a matter of months.”
Less quick was the time it took BitGo to obtain a partnership in the insurance space, as O’Brien indicated BitGo has been speaking to underwriters and industry analysts about the prospect since late 2013.
O’Brien painted this as a necessity, especially as more financial professionals enter the bitcoin space. “They are more expecting of guarantees and sophistication around these platforms. It’s not good enough just to have good code, and that we saw from a demand side and from a supply side,” he added.
Sagalow also admitted to a steep learning curve but also to “drinking the lemonade” of the bitcoin industry during his research, even starting a new venture, Bitcoin Insurance Agency, that will seek to support more bitcoin businesses.
Still, Sagalow cautioned that this won’t mean that every bitcoin company is insurable, adding that BitGo was a “logical first entry” given its security focus. However, he did express optimism that the partnership will at least create a conversation, and potentially, an opportunity akin to those that have proved successful in past tech fields.
“We’re hoping that this is just the beginning of a new version of cyberinsurance.”
Insurance image via Shutterstock