In the past couple of years the insurance market has had a lot of catching up to do where technology is concerned. But, with many businesses now starting to very effectively integrate technology at all levels, there is a thirst to move on to some of the most innovative and groundbreaking options. NFTs (non-fungible tokens) represent just such a new frontier. They are already being used in innovative ways, such as attached to artwork, and have a lot of potential but is insurance the solution for NFTs - and are they even insurable?
Getting to know NFTs
You may or may not have come across NFTs before - until this year they were really only the territory of crypto enthusiasts and didn’t have much mainstream exposure. However, 2021 was the year that auction house Christie’s sold an NFT attached to a digital artwork for the first time and - another first - Christie’s accepted payment in crypto-currency. The way that NFTs are being used in art right now is a simple example to demonstrate their worth - they can be added to a piece of digital art to indicate authenticity or ownership, for example. Because digital artwork can easily be replicated or reproduced, NFTs provide a way to prove that you’re ‘holding’ an original. NFTs exist within blockchain, which is the same structure that holds cryptocurrency and their popularity is increasing - big artists such as Damien Hirst have already revealed a willingness to use them in future.
But is insurance the solution for NFTs?
As with any new technology, credibility offers the key to more widespread adoption. The NFT market is currently viewed as immature and could even be very volatile. The potential exposure is not yet clear for insurers and the question of whether an NFT is even insurable isn’t quite possible to answer yet. Currently, cyber insurance policies are mostly devoted to securing stolen data, not cryptocurrency. The most sizable cryptocurrency insurance policy on the market today relates to third party professional cold storage insurance, which is extended to custodian centres holding digital assets. Although these policies do exist, mostly to prevent against the loss of vital codes, if they were ever tested it’s unlikely that they would cover the full value.
Is an NFT a Specie risk?
The reasoning for this is because the NFT is distinct from the artwork so could potentially fall into the Specie category as an item of high value. The major issue here, however, is how to establish its value given that there would be no trading history, and big questions arise such around whether the market for digital art is so transient that it won’t hold its value.
Is insurance actually necessary?
For a platform like Christie’s that never actually holds the token, probably not. And if the person buying the NFT believes the blockchain is unhackable then this also raises the question of whether insurance is just unnecessary. If that’s the case, is there even a market to insure something that has no risk of loss?
All these questions remain around the topic of NFT which is embryonic for now - but also full of potential.