While Web3 and the crypto world provide some unique situations, when insurance providers assess their risk, they go back to the basics. That is if they touch it all.
Most do not. Many companies’ policies explicitly state they will not cover cryptocurrency and blockchain. Vouch has policies designed to cover smart contract vulnerabilities, DAOs, cryptocurrencies, and regulatory defense coverage.
Web3 insurance shortage harms growth
Lack of insurance makes it hard for a company to grow, Vouch director of Web3 Jared Klee said. That impacts banking actions, credit access, and tax payment capability. Want to deal with Fortune 500 companies? Their vendors need millions of dollars worth of different insurance types. No insurance? No deal.
“Bad stuff happens no matter how good a company you build, and that simply has not been available,” Klee said. “It’s a massive gaping hole in the operating system for a startup. And the industry can’t get where it needs to go from an attorney standpoint without rounding out the entire operating system.”
Web3 is trying to establish itself in an exciting time, he added. Traditional insurance companies don’t consider smart contract vulnerabilities. There’s regulatory uncertainty and increasing activity from state-sponsored actors. No matter how good a company is, there are risks it cannot control. That is where insurance comes in.
It’s back to basic when assessing risk
The evaluation process is similar to how a venture capitalist considers a startup. What business is it in? What problem is it trying to solve? Can you comprehend the concept?
That’s a challenge in Web3’s early days, as dreamers who want to change the world abound. Klee said Vouch turns away more than half of the companies they meet with. Common reasons include vague concepts and ideas that are far too early. Centralized crypto exchanges, smart contract issuers, and those reinventing financial services or promising outlandish returns need not apply.
Who are the founders? Do they have experience in the sector? Do they understand the risks? Are they skilled?
Klee said that if the answers are “yes,” such teams are more likely to be thoughtful about risk management. If they tackle the most significant areas, they need a partner to transfer the other risks.
The keys to a healthy Web3 ecosystem (hint: don’t emulate FTX)
Like earlier fintech iterations like crowdfunding and P2P, Web3 will only succeed if the industry collaborates to establish trust and a comprehensive ecosystem, Klee noted. Vouch is amassing a partner list that can help its clients mature by providing them with services every successful firm needs. They include Silicon Valley Bank and Fireblocks.
Has there been an “FTX effect” on Web3? Klee observed that many lost sight of what the sector was trying to build. They were distracted by short-term returns, squeezing out what they could and moving on.
That tarnishes the true innovation that is happening, he added.
“Everything around decentralized identity is wildly exciting,” Klee said. “The idea of self-sovereign identity, that you can take back control of your data, who you are, that you can permit access to third parties to access it on an as-needed basis… It’s a wonderfully powerful idea when we dive into how credit scores work in the country and how health records work there.
“The folks building NFTs, who are trying to create a better ticketing experience for a concert with fewer middlemen so that artists can keep more revenue…Those folks are not impacted by the fact that FTX isn’t bouncing around tokens anymore. They’re heads-down building now.”
Fundraising is more of a challenge, but those who are raising are doing at good multiples and healthy rounds, Klee noted. Those successful ones have the basics covered.
“Ultimately, it comes down to whether you have a good company built properly,” Klee concluded. “And if you have a team that’s doing things right, that’s trying to build for the long term, that founder has an enormous incentive to protect their company.
“We’re there for residual risk transfer after they built a good company. After they batten down the hatches after they’ve tried to do everything right. What’s left over? That’s where insurance comes to the table.”
Tony is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.