Non fungible token: insurance world dealing with digital art revolution

Experts are studying hybrid insurances and web coverages to protect the new assets based on the blockchain system. 

Traditional fine art and cyber insurances do not cover the risks of damage, theft or loss for cryptographic works and keys.

A huge jpeg of over 21 thousand pixels per side and 319.1 megabytes in size, consisting of a collage of thousands of photographs, sold for 69.3 million dollars. On March 11th this year, during the auction held by Christie’s for the ‘The first 5,000 days’ artwork by the graphic designer Beeple, the world noticed the disruptive entrance of NFT on the digital art market.

A revolution not only for crypto-enthusiasts, because non-fungible tokens (NFT) allow to transfer the value attributed to unique or rare digital assets, certifying their ownership thanks to the blockchain. Asking ourselves whether NFTs have come to stay is as important as asking whether NFTs in fine art are insurable. Non-fungible tokens are in fact attracting the attention of market operators, opening up risk management issues for auction houses, intermediaries and other actors involved in transactions. What is the best insurance for these intangible assets? What types of risks can be covered by the existing products? What precautions should be taken by the actors involved? These are just a few questions.

NFTs are a single point on the distributed ledger of the Ethereum blockchain, which confirms the ownership of an original digital asset, and which has the same “uniqueness” of a “token” coined in a single version or part of an extremely rare series (e.g. collections). By itself, an NFT is not equivalent or changeable with any other NFT as it happens between bitcoins, which are “fungible” assets and have the same degree of interoperability and reciprocal equivalence, like real currencies.

The ownership of the digital work (a jpeg file, video, tweet, mp3 and much more …) can therefore be demonstrated with an NFT’s cryptographic key stored in a “hot” or “cold” wallet (online or on a separate hardware). However, risk associated with digital art NFT does not naturally fall into any existing insurance policy. The uncertainties associated with these dynamics have become subject of discussion in the insurance sector as NFT coverage could be a hybrid product between cyber, art and other features.

Fine art insurance policies, for example, are designed to cover only physical damage or loss. If an artwork, such as an NFT, does not have physical form “it would be a bit of a stretch to arrive at a hypothetical claim scenario in which traditional fine art insurance can respond advantageously”, observes Joe Dunn, president and CEO of Huntington T. Block Insurance Agency in Washington, a fine-art unit of Aon Plc. From this point of view, if the owner loses only the cryptographic key or hard drive containing the NFT, the digital file will still exist, and the loss will only be financial, not physical.

However, a physical aspect exists, according to Rob Rosenzweig, head of national cyber risk activities for Risk Strategies. The NFT artwork can be seen by anyone online (as it is often hosted on a URLs) and “there is the possibility that someone who does not have the authority can alter the image in some way, reducing the value assigned to this NFT as a work of an art or piece of a collection” he observes. A vandalism that can be covered with a classical fine-art insurance. But there is still a greater challenge: the theft of the private key.

“Generally, for insurers offering cybercrime cover, it has always been a problem when the loss which should be evaluated is part of a collection, and not money, titles or other tangible properties” notes Rosenzweig. “For first-party coverages, where someone seeks a direct refund for a digital asset, a fine art policy is more appropriately taken out. If we think about the way these works are valued, I think they can be better understood by art experts who intimately know that market”.

“For sale and related fine art insurance, digital or not, as far as galleries and auction houses are concerned, there can be both a first- and third-party exhibition”. A possible scenario is that a loss, theft, or damage of NFT happens while it is under the care, custody or control of the art dealer. “Obviously we have to think about a solution which allows the gallery to be remedied and the owner to be reimbursed. There is also the possibility that they will be joined by a liability claim if there has been some negligence in insuring the NFT” explains Rosenzweig. 

“One aspect which should be considered is the possibility of errors and omissions. Policyholders should ensure whether the language of the policy is broad enough and does not directly or indirectly exclude advice on the sale of digital assets”, explains Jackie Quintal, who leads the Marsh Lpc group. “By now, the language of the best structured cyber risk policies, if held by a gallery or auction house, is not exclusive and does not limit coverage in the event that unauthorized access and perpetrated cybercrime include exfiltrating, damaging or altering an NFT”, according to Rosenzweig.

Nevertheless, the market is still trying to figure out how-to take-out risk depending on how digital currencies are held. This has already been applied in the crypto world outside fine art, to exchanges and digital banking activities. Insurers still need to understand where collectors, galleries and auction houses store their NFTs and to become familiar with the vendors. A possible solution for the storage companies is to keep the physical access key to the NFT and secure it for the customer. This could also be applied to galleries and auction houses, while they have an artwork for sale on behalf of others, according to Mary Pontillo, senior vice president and head of fine art for Risk Strategies.

“People who sell, buy or exchange NFT must make sure they contact a well-known keeper – explains Pontillo -. They can also ask if it has its own insurance because it means it has been reviewed by an insurer in a crypto perspective and that it meets certain standards. Insurers will be more comfortable in providing coverage to galleries and auction houses that are partnering with a storage well-known in the market which has purchased an insurance program. That’s why I advise you to be careful when examining this aspect of the transaction”. 

Furthermore, by keeping the physical access key insured in a storage company, NFT is put under further guarantee against fraudulent behaviour in the event of a depreciation of the non-fungible-token market itself, such as the voluntary destruction of the key to recover the full price of the policy.

The coverage available in the cyber market today is mostly from third parties and would be triggered by someone filing a petition against a gallery or auction house, claiming that they have been negligent in maintaining an adequate level of network security to ensure the NFT.

Sources:

• Pushing Boundaries: Are NFTs the Next Frontier for the Fine Art Market?, Insurance journal, 1st September 2021
• How can we insure NFTs?, Insurance business mag, 13th July 2021
• Digital artwork creates new risks, Business Insurance, 1st June 2021