Non-fungible tokens (NFTs) are a $41 billion business, and where there\u2019s several zeros behind any product, there are usually insurers. However, that\u2019s not the case with NFTs, a segment of the cryptocurrency market that wasn\u2019t worth even 1% of that two years ago.<\/p>\n
But, with the announcement today (March 3) that insurance broker and wealth manager IMA Financial is investing in an R&D facility to figure out how to assess risk and underwrite coverage of NFTs, it seems pretty clear that lack of coverage is about to change.<\/p>\n
NFTs are unique cryptocurrency tokens that hold images, video or pretty much any form of media. The files cannot be changed and are tracked on blockchains. Artworks, NBA slam dunks and seven-figure, eight-bit images of CryptoPunk aliens can all be found on NFTs. The most expensive, a digital collage by artist Mike Winkelmann, drew a winning bid of $69 million at a Christie\u2019s auction last year \u2014 despite the fact that the buyer did not get the actual copyright to the work, or even exclusivity rights to display.<\/p>\n
Figuring out how to value NFTs, assess risk and set premiums is the goal of IMA Web3Labs, a company tasked with getting IMA\u2019s insurance offerings up and running \u2014 despite the reality that only a handful of sizable insurance policies have been written for the broader cryptocurrency market.<\/p>\n
Very Little Coverage<\/strong><\/p>\n Three top cryptocurrency exchanges, Gemini, Coinbase and Crypto.com, each have coverage of assets in cold storage wallets worth several hundred million dollars, while stock and crypto trading firm Robinhood has coverage from Lloyd\u2019s of London for its assets.<\/p>\n Lloyd\u2019s has also partnered with CoinCover to offer individuals hot wallet coverage, and last March, Reinsurance giant Aon launched a pilot program for offering digital asset firms coverage.<\/p>\n Saying that the company prides itself on finding \u201cfinds innovative and effective solutions to manage risk,\u201d Paul Washington, executive vice president of IMA Financial Group, explained<\/a> that the project \u201callows us to explore the risks associated with digital and meta assets from within the metaverse, so we can better prepare our clients to manage such risks.\u201d<\/p>\n First and foremost, this will involve assess custody solutions available for high-value NFTs, the company said, noting that there is \u201ca gap between the growth in NFTs and fundamental risk transfer and management strategies to secure them \u2014 a gap that leaves business operations in the decentralized finance market at risk.\u201d<\/p>\n Plenty of Theft<\/strong><\/p>\n IMA Financial has its work cut out. For one, NFTs are a complex product to value because they are, like fine art, worth only what the market says they are \u2014 and for insurance purposes, that is heavily influenced by the historical value over time.<\/p>\n For another, they appear to be just as susceptible to hacking and theft as cryptocurrencies. Earlier this month, an NFT collector announced<\/a> on Twitter that he had been hacked after he was tricked into clicking on a link that gave the thief access to his digital wallet.<\/p>\n His collection of NFTs \u2014 which included a dozen highly sought-after Bored Ape Yacht Club and Mutant Ape Yacht Club collectables worth more than $2.5 million \u2014 were stolen and hastily resold for $700,000 by the thief, before word of the theft could reach NFT marketplaces.<\/p>\n Then, on Feb. 19, top NFT marketplace OpenSea was itself<\/a> hacked, with more than 250 NFTs worth $1.7 million stolen.<\/p>\n This is despite the fact that non-fungible means they are one-of-a-kind. As such, it should be easy for NFT marketplaces or private buyers to check and see if they are stolen, particularly on any high-ticket items.<\/p>\n While this pales in comparison to recent crypto hacks \u2014 just two incidents in the past six months netted nearly $1 billion \u2014 it\u2019s a big problem, especially as the attack vectors range from simple phishing to complex coding flaw exploits.<\/p>\n See more:<\/strong> PYMNTS Crime Series: Another Day, Another Nine-Figure Crypto Hack<\/a><\/p>\n Besides that, a February report<\/a> by blockchain intelligence firm Chainalysis found a big wash trading problem and emerging money laundering concerns in the NFT market.<\/p>\n Any Value There?<\/strong><\/p>\n However, there is a bigger risk that\u2019s harder to assess, which is whether or not NFTs will really keep their value as well as Jeff Koons\u2019 painting or a Mickey Mantle autographed baseball.<\/p>\n While there is a lot of hype and marketing drama around NFTs as brands like Nike and Samsung \u2014 to say nothing of recording artists as diverse as Snoop Dogg and Dolly Parton \u2014 make high-profile dives into a market awash with money and branding opportunities, there\u2019s a big question about whether the NFT business has any real legs, from both a collectable and a marketing perspective.<\/p>\n For one thing, on the marketing side, the most effective use of NFTs comes inside of metaverses, or virtual reality worlds where companies can set up signs, offer customer service and experiential marketing games, and equip people\u2019s avatars with virtual designer handbag.<\/p>\n IMA Financial set up its Web3Labs in Decentraland, the leading metaverse in blockchain, with \u201cWeb3\u201d referring to the next-generation, blockchain-based web infrastructure that many crypto supporters believe is the future of the internet.<\/p>\n The problem is that the metaverse is in its infancy and only able to come into its own with the wide availability of high-resolution, 3D user technology necessary to immerse metaverse participants \u2014 and that technology doesn\u2019t exist yet.<\/p>\n For another thing, the main current use of NFTs is in immersive massively multiplayer online games (MMOs), notably blockchain-based play-to-win games like Axie Infinity.<\/p>\n While many in the industry believe they are the future, Axie is the only major player at the moment and it is having serious problems<\/a> attracting enough new players to support the play-to-earn model, which relies largely on creating and selling in-game items in the form of NFTs.<\/p>\n A top mainstream gaming company, Ubisoft, recently introduced NFTs to a roar of customer dissatisfaction, with Cointelegraph noting<\/a> in December that 96% of the votes on a YouTube product launch announcement were dislikes \u2014 based largely on customers seeing the NFTs as a naked cash grab.<\/p>\n It\u2019s not only gaming: Top Korean pop star Sunmi and her label, Abyss Company, were the targets<\/a> of similar backlash from K-pop fans recently, for the exact same reason.<\/p>\n There\u2019s a semi-famous picture on the Internet meme circuit of a divorcing couple on their knees in a courtroom in the late \u201990s, dividing up the joint wealth they amassed in a collection of several dozen Beanie Babies.<\/p>\n For the uninitiated, Beanie Babies are small stuffed animals issued in vast numbers but with some models in very limited quantities. In the 1990s, they went from being a collector craze to a boom, to a full-on Tulip bubble big enough to rate a new HBO documentary<\/a>, \u201cBeanie Mania.\u201d<\/p>\n Seen any lately?<\/p>\n
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