BitGo's $700 million crypto custody insurance program: what it means and why it matters

Quick Take

  • BitGo’s announcement of a $700 million insurance program for digital assets in cold storage is big news.
  • Insurance has made commerce possible for thousands of years by allowing risk to be pooled and transferred.
  • BitGo’s announcement is one more step in the process of bringing Bitcoin and other digital assets to both Main Street and Wall Street

Digital asset custodian BitGo announced Wednesday that it has secured a total of $700 million in insurance coverage for the assets in custody in cold storage. This is an important milestone in the continued mainstream adoption of bitcoin and other digital assets.  

That top-line figure represents an addition of $600 million in capacity to the $100 million it debuted in early 2019

To understand the significance of this development, a little bit of historical context is helpful, as well as a discussion on some of the nuts and bolts of the insurance program and how it will work for BitGo customers.

How insurance works and where it came from

Let's start with a very broad question: what, exactly, is insurance? 

At its most basic, insurance is a financial instrument -- a way to finance the cost of future risk. It’s pretty simple. On the one hand, you can self-insure risk, holding onto it yourself and bearing the full cost of a loss (unless you have transferred it contractually in an indemnity agreement with a counterparty). Or you can pay an insurance company a premium to take some or all of that risk from you. 

Insurance companies make their money by choosing risks carefully and then generating earnings in a tax-advantaged way on investments of pooled premium dollars. I am over-simplifying here, yes, but this is the fundamental model.

There's nothing new about this. Insurance in one form or another has been around for a very long time, predating Satoshi's bitcoin whitepaper by about 4,000 years. Indeed, the first insurance-like contracts in recorded history were in the form of marine loans used by Phoenician traders. The Greeks, and the Romans later on, learned about this proto-insurance, and examples of Roman marine loans can be found in the writings of Demosthenes.[1]

Maritime traders from what is now Italy are usually credited with creating the first true insurance policies in the 14th century, whereby risk is laid off to a third party whose business is principally in underwriting risks and making money from pooled premium dollars.   

Insurance for shipping makes a lot of sense. It protects not only the boat’s owner(s) but also the people with an interest in the cargo. By spreading the risk of loss over a group, one can protect against the risk of loss by paying a percentage of the value of the total property at risk, and benefit from economies of scale when others do the same.

That maritime insurance model was taken up by Lloyds