Insuring a new asset class: the NFT problem

The appearance of NFTs in recent years has presented a significant opportunity for insurers. As unique digital assets, they are becoming increasingly popular in the realm of fine art and collectables, with collectors bidding for a digital certificate of ownership of the original. Here, Andrew Mazeika and Sallyanne Caswell explore the challenges presented by underwriting crypto-related risk and discuss why only 4% of the entire cryptoasset market is insured.

COVID-19 has led to a monumental shift in the art market. Whilst galleries remained closed, online marketplaces thrived. For example, an NFT of a recent piece of digital art by Beeple, sold for a staggering £69m.

Charles Allsopp, a former Christie’s auctioneer, stated that the concept of buying NFTs makes “no sense” as buyers are essentially purchasing something which isn’t there. On the other hand, it can be beneficial for artists to prove the authenticity of artwork, provide a chain of ownership and gain commission on their work on every subsequent sale.

It is important to note that the sale of NFTs involves the buying and selling of a certificate of ownership rather than a physical work of art. Consequently, there is no need for the artwork to be insured for damage and transportation.

Why is insurance needed for NFTs?

NFTs and other crypoassets are designed to be secure, with possession of NFTs stored on the blockchain and ownership linked to two pieces of code associated with a “wallet”. If this “wallet” is hacked, or access codes are lost, the NFT would become inaccessible by the owner. With vast sums at stake for investors, the risk of cybersecurity breaches poses an opportunity for insurers.

Unfortunately, many insurers feel uneasy entering into an evolving market, making cryptoasset insurance limited. The volatility of NFTs makes their value difficult for insurers to predict, regulate and consequently insure. Existing market solutions such as professional cold storage insurance could help to protect the physical loss of codes or hard drives in custodian centers, but they rarely provide investors with a full indemnity.

Despite the risks, NFTs are likely to play a significant role in the art market going forward. Some artists are calling for contract NFTs to be used alongside physical artwork to provide both a certificate of authenticity and a certificate of ownership. The contract NFT would facilitate payment so that monies are transferred only once the buyer is in receipt of the physical artwork. This would prevent fraudulent behaviour, provide artists with resale royalties, and ensure greater transparency for artists.

If insurers are to keep pace with evolving technology, a full understanding of NFT operation is a necessary first step for those looking to participate.

If you have further questions on any of the above or would like to know more about the opportunities presented by NFTs and crypto, our team is happy to help, you can contact us here.