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Is it possible to insure an NFT?

NFTs (non-fungible tokens) exploded in popularity during 2021 and their growth shows no sign of slowing down – driven by the sale of everything from digital artworks to football memorabilia. What’s more, the sale of these digital collectibles is growing into a vast global market. Overall, the global market for NFTs was worth over £30bn in 2021, while Christie’s auction house saw its NFT sales reach £80m in less than a year. [1]

 

What is an NFT?

 

In simple terms, NFTs are based on the same technology as Bitcoin and other cryptocurrencies – blockchain. This is essentially a shared database containing records that, once added, are very difficult to change. It’s a digital ledger that can be used to record any kind of information, but is commonly used to record contracts, trades, ownership and digital signatures.[2]

 

What does non-fungible mean?

 

This ledger is the basis for cryptocurrencies and NFTs - the difference being that cryptocurrencies are 

fungible, so swap one Bitcoin for another and you end up with essentially the same thing. NFTs meanwhile are non-fungible - each is a unique digital token that links to a one-of-a-kind digital or physical asset – so they cannot be traded or swapped without ending up with something entirely different.[3]

 

For example, if you traded an NFT linked to a Banksy artwork for one linked to a work by the digital artist, Beeple, you’d end up with a different asset to the one you originally owned.

 

Why are NFTs valuable?

 

This is where it all gets a little complicated, but to understand this we need to go back to the invention of Bitcoin, which meant that, for the first time, financial value could be digitised. Bitcoin creates and preserves that digital value because ownership can be publicly verified via a shared digital ledger (blockchain) and because supply of Bitcoin is limited to a maximum of 21,000,000 units.

 

As is the case with gold, it is this scarcity and limited availability that creates and stores financial value.[4]

 

All this means that the owner of an NFT has the right to sell it to anyone else down the line in the same way that physical artworks can be bought and sold. It is important to remember, however, that the NFT is not the art itself. Rather the NFT is essentially a receipt, or digital deed of ownership – what’s more, their use it not limited to digital art, and can be associated with almost anything, including physical art or even property.[5]

 

What are the risks associated with NFTs?

 

Unfortunately, the risk associated with buying and owning NFTs appear to be on the rise as hackers, scammers and other cybercriminals seek ways to exploit them for their own gain – at least in part because they can change hands for such large sums of money (Beeple's Everydays: The First 5000 Days sold for £55m.[6]).

 

In essence, this has led to the emergence of two main forms of NFT crime – theft and scams.[7] For instance, there is a popular NFT called Bored Ape Yacht Club, so when another NFT with a similar name (The Big Daddy Ape Club) came along, it sold well. However, the promised NFTs were never delivered and investors were scammed to the tune of around £900,000.[8]

 

Meanwhile, quite recently, cybercriminals hacked into the Instagram account belonging to Bored Ape Yacht Club and stole around £2.4m worth of NFTs – worryingly that was achieved with a relatively simple phishing attack.7

 

Can you insure an NFT?

 

In terms of off-the-shelf NFT insurance policies designed to protect NFTs in the way property policies protect physical assets, the simple answer is ‘no’. However, this is a complex area, so it is important to understand why those policies are not yet widely available and, in their absence, how you can protect your NFTs.

 

Broadly speaking, there are three main reasons why NFT insurance is not yet fully developed: 6 7

 

  1. Unclear value - There is uncertainty around the valuation of NFTs: Unlike a home or a car, whose value will be relatively well known, an NFTs value is much harder to determine, especially as the market is still immature. That means it is difficult for insurers to understand the level of financial risk involved in covering NFTs – in turn that makes it hard to price NFT risks in any standardised way and therefore develop off-the-shelf NFT insurance policies.
     
  2. Disparate or intangible assets - An NFT is essentially two assets – the artwork or other item the NFT links to and the NFT token itself. In fact, in many cases the NFT and the artwork are intangible – meaning they don’t physically exist. They exist digitally but can be held in very different locations, which may face different risks. This again complicates the process of designing standardised NFT insurance.
     
  3. Uncertain future - The risks affecting NFTs are not well understood and the technology is evolving fast, which again creates a significant barrier to developing insurance products, since most insurers will want to know precisely which risks they are taking on, and that those risks are relatively stable.

 

All that said, the sheer scale of the NFT market – which is already comparable to the physical art market in size and predicted to grow to by an astonishing £120bn by 20267 – means that insurance solutions will begin to emerge over time.

 

 

Sources


[1] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/lack-of-nonfungible-token-insurance-coverage-inexcusable-as-market-expands-67939402

[2] https://www.euronews.com/next/2021/10/21/blockchain-explained-breaking-down-the-technology-that-s-transforming-the-world-of-finance

[3] https://www.theverge.com/22310188/nft-explainer-what-is-blockchain-crypto-art-faq

[4] https://robfreeman.com/nft-insurance/

[5] https://www.insurancethoughtleadership.com/emerging-technologies/nfts-are-hot-where-insurance

[6] https://www.iamagazine.com/markets/nft-insurance-understanding-the-challenges-and-solutions

[7] https://www.mantralabsglobal.com/blog/can-nfts-be-insured-and-who-carries-the-risk/

[8] https://www.forbes.com/sites/lcarrel/2022/01/28/as-nft-scams-grow-in-number-nft-insurance-hits-the-market/?sh=262bce407bcb#:~:text=NFTs%20Can%20Be%20Insured,the%20risks%20inherent%20in%20NFTs.

 

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