The Next Frontier – Exploring Insurance for NFTs

By 9 April 2024Blog

Image Source: #freehawaiiphoto, Cath Simard

A Non-Fungible Token (NFT) is a digital asset that signifies ownership or proof of the validity of a special item, work of art, photograph, or digital collectable. Unlike fungible (interchangeable) digital assets, such as Bitcoin and Ethereum, NFTs are unique. That means they cannot be traded one for the other, as each NFT has its own unique independent value.

NFTs enable businesses to reach a large and varied client base because they are accessible to a global audience. Increased market accessibility can provide new growth prospects and support a global network of investors and collectors.

Businesses can also specify licensing conditions and royalties, which allows them to continue making revenue from the sale of their digital assets. When creators sell their NFTs on secondary markets, a portion of the sale price goes to them.

NFT technology can also help businesses generate more revenue through gaming and virtual goods, brand merchandising or licensing, and digital art and collectables.

Like Bitcoin and other digital assets, NFTs have proved volatile, rising and falling as the hype that surrounds all innovative products gives way to perceived reality. However, as reported in Wired, quoting Web3 expert Diego Borgo, ‘One thing we know about technology is that you can’t put the genie back in the bottle. The tech will evolve to better and better use cases and applications. It’s simply a better mousetrap. What most people don’t realise is that NFT use cases are massive.’  

The importance of insurance

Because NFT technology is new and the use cases are multiplying and evolving, risk is inevitable. With each new business model, whether for cryptocurrencies such as Bitcoin or for NFT artworks, insurance should be appropriate for the threat levels, and brokers must help to shape policies accordingly to mitigate the risks.  

NFT marketplaces and platforms are vulnerable to data breaches, phishing, and other cybersecurity risks. Cybersecurity event costs, including those for investigation, notification, and recovery, can be covered by insurance.

Operational disruptions caused by unanticipated events, such as server failures, technical difficulties, or natural disasters, can occur in NFT marketplaces. Losses resulting from these interruptions and intellectual property disputes can also be insured.

Legal requirements

Web3 businesses must comply with ever-changing legal requirements. Businesses can meet regulatory requirements more easily by complying with the best practice controls and procedures required when taking NFT insurance.

Regardless of the safeguards in place, issues and disputes may still arise over the following:

      • Theft
      • Royalties
      • Data hosting and storage
      • Data protection
      • Intellectual property
      • Taxation
      • Sales

Businesses need to consider their risks and the type of cover they require for their unique requirements and risk profiles.

Types of insurance

Typical cover would include the following:

      • Crime insurance
        • The risk of theft of NFTs through digital theft or hacking requires crime insurance. Since NFTs are essentially digital assets stored on a blockchain, they are vulnerable to various theft risks which crime insurance can cover.
      • Cyber insurance
        • Cyber insurance is crucial. It covers losses arising from data theft, hacking, data breaches, and other cyberthreats. The expenses associated with analysing and responding to cybersecurity events might also be covered by this kind of insurance.
      • Directors and officers insurance
        • The challenges in navigating a business entering and operating in an emerging industry, with changing regulations, volatile business conditions and innovative technology can mean increased liability exposure to a Web3 firm’s management and directors. Suitable D&O insurance should be in place to offer a safeguard should these risks materialise.
      • Errors and omissions (E&O) insurance
        • E&O insurance is a type of professional liability insurance that offers defence against accusations of carelessness, mistakes, and omissions in the provision of expert services. It is essential for NFT companies that offer advisory or consultancy services relating to NFTs.
      • Intellectual property insurance
        • Claims of intellectual property infringement, including copyright and trademark disputes, can be covered by intellectual property insurance. This coverage is crucial for NFT  companies that  might license or use third-party intellectual property.

Choosing the right insurance broker

Any business operating in the NFT space is advised to work with a broker with experience in insuring digital assets. With Elmore Insurance Brokers, NFT businesses have a trusted partner with a deep understanding of digital technology, expertise in cyber insurance and blockchain insurance, and who can provide suitable coverage.

Elmore prioritises prevention. As well as placing insurance, Elmore’s specialists offer risk management advice and insurance reviews to minimise potential risks and protect digital assets.

For more information, please contact the Elmore team.

en_GBEnglish (UK)