An Emerging Sector: NFT Insurance

Non-fungible Tokens (NFT) are becoming more well-known as a popular way to buy and sell digital artwork. The cost of NFTs varies significantly and in some cases, collectors may pay millions of dollars to buy these digital assets. As of 2 December 2021, the NFT artwork “The Merge” has officially become the most expensive NFT ever sold, with nearly 30,000 collectors pitching in for a total cost of $91.8 million. As a result of NFT values ​​reaching millions of dollars, the need for NFT insurance has arisen. In this line, we see that in order to protect NFTs, the insurance industry is trying to develop new types of coverages specifically tailored to the risks associated with NFTs.

What is an NFT?

NFTs are blockchain-based cryptographic assets with unique identification codes and metadata that distinguish them from one another. NFTs are connected with each other through software codes in the form of “smart contracts”. These smart contracts include the terms and conditions to transfer NFTs. NFTs can represent both physical and digital items; such as works of art, real estate, music, or videos. The data processed on the field called “metadata”, determines what the NFT represents.

The significance of NFTs is based on its unchangeable and one-of-a-kind nature. Unlike cryptocurrencies, it is a unique token that cannot be imitated or changed. This feature is helps NFTs to be used as “certificate” properties in the digital world just like a proprietorship certificate. It is important for the collectors that the NFT is unique.

Risks Related to NFTs

In exchange of premium payments, insurance enables an individual or entity to receive financial protection through an insurance company. Basically, it is a type of risk management that is primarily used to mitigate the risk of a contingent or uncertain loss. NFTs, like other digital assets which require insurance, inherent risks unique to its nature.

For instance, when NFT is created, it includes both a public and a private key. The blockchain ledger is traversed by the public key as the private key serves as proof of ownership. Insurance may come into play when the private key is lost and can compensate for this ownership loss. Also, there has been an increase observed in the number of replica and fake digital assets made to look like originals and insurance may be relevant against these types of fraud claims.

Cyber ​​Insurance as a Solution

Cyber ​​insurance is a type of insurance that provides protection against risks which may occur in the digital age, such as data breaches or malicious cyber hacks on computer systems. In this context, NFT insurances can be classified under cyber insurance. Status of the NFTs is not defined in the Turkish law. Hence, whether they can be insured as movable property is debatable. However, we would also like to state that there is no legal obstacle to insure NFTs in the current system.

Consequently, it is stated that NFTs may be subject to insurance policy in two different ways, crime insurance and damage insurance. While the damage insurance provides coverage for damages caused by intervention on the blockchain; crime insurance provides coverage against crime such as theft or damage to property, or for fraudulent activities such as a third party placing a fake product in the NFT marketplaces.

Challenges

As we stated earlier, risks related to NFT purchases require NFTs to be insured. Despite of this fact, NFT insurances are not in the scope of insurance policies at the current moment. Only some companies offer crypto protection similar to insurance policies. This situation stems from various sector specific challenges. The most prominent challenge for the emerging NFT insurance sector is the problem of the valuation of NFTs. As NFT is non fungible, there is no market price similar to the way a cryptocurrency may evaluate. Also, when we consider that technology is developing at a breakneck pace, the ambiguity in the scope of the risks involved in NFTs is another reason why insurers are hesitant. Finally, the lack of legal framework regarding cyber insurances in insurance laws and regulations poses a challenge for parties of the insurance policy.

Final Remarks

The development of NFT insurance is still at early stages. The current trend indicates that insurers will continue to try to weigh the risks and offer NFT insurances in the future to meet the demand in the sector. Of course, we should note that enactment of laws and regulations is required for this emerging sector to stand out as a reliable and profitable sector.

You may reach our articles on the other current discussions related to NFTs here.

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