Gemini launches captive insurance firm

Cryptocurrency trading platform and custodian Gemini Trust Company announced Thursday that it has launched its own in-house insurance unit to protect client’s funds against loss.

Dubbed Nakmoto, the unit is a captive insurance company licensed by the Bermuda Monetary Authority. The subsidiary covers losses up to $200 million for customers of the firm’s Gemini Custody solution, which is an offline cryptocurrency cold storage service. 

A captive insurance company is an insurance company created and controlled by its parent company for the purpose of insuring that company’s risks. As an alternative to self-insurance, it can offer direct access to reinsurance markets, which allow insurers to offload part of their liabilities to other insurers for a price. A captive can also serve as an investment vehicle.

Gemini, which is owned and operated by Tyler and Cameron Winklevoss, claims that the captive gives it the largest limit of insurance coverage purchased by any crypto custodian in the world. The New York firm said it collaborated with leading insurance brokers Aon and Marsh to launch the solution.  

“Insurance is one of the main barriers to crypto mass adoption,” Cameron Winklevoss, the firm’s president, said in a statement. “Obtaining meaningful insurance in the crypto industry remains a challenge, and our captive will help to increase our insurance capacity and move the industry forward.”

Separate from Gemini Custody, Gemini also offers insurance for customer cryptocurrency held in its online hot wallet. And U.S. dollar customer deposits are eligible for Federal Deposit Insurance Corporation “pass-through” deposit insurance of up to $250,000 per individual. 

As a registered New York trust company, Gemini also carries state-mandated insurance against employee theft, computer fraud, and fund transfer fraud.

Insurance in cryptocurrency

In the traditional finance world, insurance is largely provided by the FDIC, which is mainly designed to cover insolvency.

Cryptocurrency exchanges are a different story. They are notorious for getting hacked, often by well-funded and well-organized groups. Anytime keys to cryptocurrency assets are exposed to the Internet, which generally happens when funds are actively traded, they are at risk of theft. 

This is why most exchanges keep the majority of their funds in cold wallets—storage drives kept unconnected from the Internet. The industry standard is to keep no more than 2% to 5% of funds in Internet-connected hot wallets at any given time.

Another U.S. cryptocurrency exchange, Coinbase, covers up to $255 million in coins in its hot wallets. As CoinDesk reported last year, Coinbase has also been exploring a deal with Aon to create a captive.