Guarding your digital gold with cold storage insurance

In the age of digital currency, cold wallets are the equivalent of steel vaults securing your cryptocurrency assets. A cold wallet - also known as a hardware wallet - is a wallet to store your private crypto keys offline, most often on a physical device. However, unlike a physical vault, the security of cold wallets doesn't stop at the door; it extends to insurance coverage too, and so this is where cold wallet insurance comes into play.

Despite being a ‘new’ form of currency, as with fiat, millions of dollars worth of cryptocurrency assets are stolen daily. Therefore, safeguarding digital assets, particularly those stored in cold wallets which are physically isolated from online threats, is just as important as safeguarding traditional assets and those stored on-chain​.

In 2022 more than a million Bitcoin (BTC) transitioned into self-custody and there was a noticeable upwards trend in the level of illiquid BTC supply. This illiquidity started at 14 million in January 2022 and rose to over 15 million by December 2022. This suggests that 78% of circulating BTC supply was stored in cold wallets by the end of that year.

A cautionary tale of tampered hardware wallets

Cold wallet insurance - which is currently only available for businesses - is designed to safeguard wallet-protected cryptocurrencies from losses due to theft or malicious attacks. Considering the portability and potential high value of cold wallets, they're an appealing target for criminals, making insurance coverage an attractive risk management option.

In May 2023, a hardware wallet exploit was uncovered by the cybersecurity company, Kaspersky. The manipulated wallet, although appearing normal, had been tampered with internally, disabling protective features and modifying the seed phrase and password input. This gave attackers full control over the wallet leading to a loss of nearly $30,000.

The incident underlines the importance of purchasing hardware wallets from trusted sources, verifying firmware, securing seed phrases with strong passwords, and looking out for physical signs of tampering.

Crime vs Specie

The cost of cold wallet insurance varies, with annual premiums typically between less than 1% and 5% of the insured assets, depending on the type of cover obtained. There are two types to choose from: crime insurance and specie insurance.

Crime insurance safeguards against losses due to a variety of types of theft or fraud - a crucial shield in the digital realm of cryptocurrency.

Specie insurance, conversely, protects physical assets, like cold wallets, against insider theft or accidental destruction of private key data, but doesn't cover hacking​.

Cold wallet insurance can feel like an investment, but the cost of venturing into the cryptocurrency world uninsured can often be far higher​​.

Threats to hardware crypto wallets

As with any physical item, there are a number of threats to insure against, but unlike your laptop, bike or business, there are some nuances.

These threats include:

• Loss or destruction: risk of losing the wallet or it getting physically damaged
• Phishing and scams: vulnerability to social engineering and fraudulent activities
• Malware: threat from virus-infected computers or smartphones
• Fake and modified wallets: risk of buying counterfeit or tampered devices
• Physical hacking with memory analysis: threat from physical intervention and data manipulation
• Internal collusion: collusion within the business that sees insiders transfer the assets to wallets controlled by them.

What can businesses do to mitigate risk?

Fortunately, there are several steps businesses can take to bolster their security framework which in turn, may bring down the cost of their insurance premiums.

Insurers typically consider the following measures when determining premiums:

• Whitelisting: Insurers are likely to be stringent on this. If a business lacks a whitelisting policy that restricts crypto transactions to only pre-approved addresses, it may be challenging to secure insurance coverage.
• Duty segregation: This is a system where responsibilities are distributed among multiple parties lessens the risk of internal fraud and collusion. Although it may introduce some complexity to transactions, the enhancement in security is substantial.
• Disaster recovery: Engaging a service to retrieve your keys if misplaced or forgotten is crucial. This ensures consistent access to your private keys, adding an extra layer of security.

What to look out for

As you explore the option of cold wallet insurance, we encourage you to thoroughly review and understand the policy details - something we can help with. It's important to grasp the specifics, such as the extent of coverage of your assets, the potential presence of a deductible for claims, and the method for calculating claim amounts. The way you manage your cryptocurrency assets, like distributing them across multiple wallets, can impact various aspects of your insurance.

The importance of cold wallet insurance in the ever-evolving cryptocurrency landscape cannot be downplayed. Balancing crime and specie insurance could provide robust protection against a spectrum of risks.

Though the process of obtaining such insurance is rigorous, it reinforces a firm's security measures. Comprehending potential threats and adopting strategic responses, along with a clear understanding of your insurance policy, is critical. Cold wallet insurance can provide added security for those involved in cryptocurrency, helping to strengthen your asset protection strategies.

Curious about securing your digital assets? Have a chat with our digital assets team today about cold wallet insurance. We're here to answer your questions and help you understand your options.