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NFTs Insurance (Non-fungible tokens Insurance) is a hot topic, gaining attention from pop culture to the business press. Therefore, most of this notoriety has been associated with the buying and selling of digital collectibles, but the underlying blockchain technology. This specific application of it have implications for tangible assets and for insuring both digital and physical properties.
NFTs and Insurance potential
Insurance policies are being developed on the blockchain as non-fungible tokens themselves using the ERC-721 standard for insurance according to the EIP-1523 standard.
The EIP-1523 standard was proposed in October 2018 to standardize the metadata associated with an NFT insurance policies. This is a separate concept from buying insurance to protect against the loss of or damage to an NFT.
Jakub Krcmar, CEO of Veracity Protocol, in his discussion about the concepts of computer vision, digital twins, and NFTs of physical products, said “The ability to create a unique digital twin of exact replicas – like identical baseball cards or identical automobile gears – to create an NFT may have major insurance implications. One example was the potential for NFTs to be associated with high-value physical objects to demonstrate authenticity of ownership and reduce or eliminate fraud opportunities
It is possible to purchase NFT insurance, but it can be difficult to find. The market is relatively new and volatile. Therefore you’ll have to weigh value against risk to determine the right policy for your needs.
The key is to make sure that your NFT is safe and insured against any damage or loss. Here are some tips for getting an NFT insurance policy: a. Do some research about the company before buying any coverage.
NFTs Can Be Insured
To protect NFTs, the insurance industry is developing new forms of coverage, designed around the risks inherent in NFTs.
It’s definitely the Wild West out there,” said Michael Giusti, senior writer at insurancequotes.com, an Austin, Texas, insurance marketplace. “Just because someone sells an NFT doesn’t mean they necessarily owned the underlying asset … It would be like someone standing in front of their neighbor’s house with a counterfeit deed. Just because someone paid money for that deed doesn’t mean they now own the house.” But investors need to take steps before they buy an NFT.
“Check out the details of the NFTs, review the metadata, look at the URLs of the metadata as well as the URLs for the JPEGs,” said Henley. “It’s easy to switch out URLS and think you are purchasing an NFT but you are not. … Ensure that you purchase NFTs on a trusted site … and again do your due diligence.”
The advent of nonfungible tokens, or NFTs, has made buying and selling digital art a reality. But, just like with physical artforms, there is a whole host of dangers out in the world for digital art.
Whether it is to protect the underlying piece of art, the NFT itself, or just prevent run-of-the-mill hackers from stealing your digital art. NFT insurance is beginning to bring some of the peace of mind from the physical art world into the digital realm.
“Just like any other cryptocurrencies or tokens can be insured under certain circumstances, for certain losses, it’s possible to insure NFTs across different risk vectors,” said Sharon Henley, vice president of research and development for Coincover.
Coincover is an insurance company based in the United Kingdom that specializes in cryptocurrency insurance policies. They offer one of the only commercially available policies for NFTs at the moment.
How Does Insurance Work with NFT?
The fact that the NFT is not the artwork itself — instead a digital address for the art — presents some unique challenges from an insurance point of view. Each element introduces some risk, and it all needs to be either managed or insured.
Since the artwork could be housed on an offsite server, the first danger is that the digital asset itself could be destroyed. If there was only one copy of a photograph, and it is deleted, or its file gets corrupted, or it is locked into a ransomware attack, then that would be the same as an oil painting being destroyed in a fire. The insurance policy would need to protect against that digital “damage or loss.”
If the NFT is linked to a digital media file, it should be insurable. A cyber policy should include the restoration of digital assets. It’s important to download and store the digital file redundantly.
You should use a hash algorithm to ensure that the hash of the file matches that of the original. Then, if your NFT is not irreplaceable, you can try to retrieve the digital file by using its hash algorithm
There are insurance implications for the NFT itself as well. If the private key is lost, that would mean that the owner no longer has control over the asset. The same goes for if a hacker gains access to the owner’s digital wallet and makes off with the token.
“Are you protecting the Token – the ERC- 721 or ERC-1155 or are you protecting the metadata describing the NFT or are you protecting the JPEG? guaranteeing that the token, metadata and JPEG are always accessible? Are you guaranteeing that the metadata and JPEG have not been compromised? There are a lot more risk vectors that need to be factored in and protection policies need to be clear as to what types of policies exist,” Henley said.
In the case of art or music NFTs where royalties for usage and transfer could potentially be assigned, owners also need to protect against so-called “smart contract failure,” which could mean financial loss if royalties couldn’t be captured or paid down the road.
Being able to transfer the token to an heir after death is another insurance consideration.
With the assets being digital, that introduces an even further quirk into the question of insurance.
Most traditional property insurance policies require physical damage to an asset before a claim can be filed. But, in cases of digital artwork, proving physical damage would be difficult, if not impossible.
So, with all these questions, only a few first mover insurance companies, such as Coincover and Lloyds are dipping their toes into the market for now.
Issues with Insuring an NFT?
Not all NFTs are the same because some are 100% digital and others are digital representations of tangible items.
Conventional insurance coverages that could conceptually cover digital NFTs are property, cyber and crime policies. However, each falls short when it comes to NFTs.
For instance, today’s standard commercial property policies are triggered by “direct physical loss” to “Covered Property“. As described below in the commercial property form the defined term “Covered Property” includes:
Building: NFTs are not part of the physical building.
Business Personal Property (BPP): An NFT could be considered BPP, if a business invested in an NFT.
Property of Others: An online crypto custodian of NFTs, such as Gemini, could perhaps have NFTs as property of others.
However, an NFT cannot trigger a property claim because an NFT lives on an intangible blockchain and is unable to suffer direct physical loss or damage.
As described by IRMI, NFTs are not covered by the standard commercial property policy. Similarly, personal property policies covering valuable articles like artwork do not cover intangible items.
Property Not Covered is a defined term in the commercial property policy that excludes accounts, bills, currency, food stamps or other evidences of debt, money, notes or securities.
NFT insurance is complicated further by pricing fluctuation and a lack of consensus about the value of NFTs at any given time.
A cyber insurance policy may provide coverage for digital asset restoration, but a blockchain is a decentralized system that does not reside in any one place. Indeed, the whole purpose of a blockchain is that it is NOT supposed to be owned by a single entity.
And cyber insurance policies may exclude cryptocurrencies from their definitions of money and securities.
Commercial crime coverage excludes cryptocurrencies… And while it’s possible to add the “Include Virtual Currency as Money” endorsement (CR 25 45) onto the commercial crime policy, coverage is sub-limited and contemplates fungible digital currencies (such as bitcoin) that have high liquidity based on public exchange rates.
In the future, an insurance policy for NFTs may be developed that is a hybrid of property, crime and cyber coverage.
Scammers and NFTs
A major danger in the world of NFTs is the complex world of copyright. Just because someone sells an NFT doesn’t mean they necessarily owned the underlying asset they say they are selling to begin with.
It would be like someone standing in front of their neighbor’s house with a counterfeit deed. However, that someone pays money for that deed doesn’t mean they now own the house.Tales of rampant counterfeiting and art theft have been widely reported around many of the most prominent NFT marketplaces.
So, in addition to protecting the NFT once someone owns it, they would also do well to ensure they are buying an authentic piece of art before handing over the money.
“Check out the details of the NFTs, review the metadata, look at the URLs of the metadata as well as the URLs for the JPEGs,” Henley said. “It’s easy to switch out URLS and think you are purchasing an NFT that you are not.”If someone is scammed, the complexities of copyright law make the question of how to recover their losses murky.
For one, if someone sells a bogus NFT, that may be a case of fraud between the buyer and the scammer, but it isn’t necessarily a copyright violation of the artist, since it wasn’t the art that was being sold, but instead a “receipt” for that art.
“Ensure that you purchase NFTs on a trusted site and when you exchange/sell them, again do your due diligence and look to see you are not being scammed or such,” Henley said.Copyright law is complex, and selling a “deed” is not the same as copying the art.
The counterfeit NFT would be worthless, but it would be hard for the artist to take action in a case like this unless someone actually makes a copy of the work that they bought, and in that case, the suit would be against the scam victim who made the copy, rather than the scammer who sold the bogus NFT.
In Conclusion
Proinsurance blog will continue to update on NFTs insurance. However, approximately 13% of Americans have invested in cryptocurrencies and digital assets and I believe this will number will only increase.
As digital assets represent an increasingly large percentage of all investment portfolios over time, the need for digital asset insurance and risk management, such as for NFTs, will only increase as well.
Therefore we’re looking forward to many more insurance companies coming into the market.
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