Jane Dotson
BlockFi is a crypto exchange that offers its customers bank-like services, including crypto trading, a crypto wallet, and crypto interest accounts. However, unlike traditional banks, BlockFi does not provide FDIC or SIPC insurance for its customers' deposits. This means that in the event of BlockFi's failure, customers may not be able to recover their funds through insurance. While BlockFi has claimed to provide security for its customers' assets through collateralization protection, the recent turmoil in the crypto market has raised concerns about the safety of deposits on crypto exchanges and lending platforms. As a result, the risk of insolvency for some companies, including BlockFi, is a significant concern, and depositing funds with these lenders is considered highly risky.
| Characteristics | Values |
|---|---|
| FDIC-insured | No |
| SIPC-insured | No |
| Collateralization | Yes |
| Over-collateralization | Yes |
| Third-party commercial crime insurance | Yes |
| Aon insurance | Yes |
| Insured by Lloyd's of London | No |
| Insured by Nexus Mutual | Yes |
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What You'll Learn
BlockFi deposits are not FDIC-insured
BlockFi is a crypto exchange that offers its customers some bank-like services. However, it is important to note that BlockFi deposits are not FDIC-insured. This means that if BlockFi were to fail as a business, customers would not be able to rely on FDIC insurance to protect their assets.
Unlike traditional banks, which are federally insured, BlockFi does not provide FDIC or SIPC insurance for its customers' deposits. This is because BlockFi is not a bank or a broker, and its assets inside BIAs (BlockFi Interest Accounts) are not protected by the same regulations as traditional financial institutions. While BlockFi has described a type of collateralization protection, this is not the same as FDIC insurance and may not provide the same level of security.
BlockFi's lack of FDIC insurance means that customers bear a higher level of risk when depositing funds with the company. In the event of a bankruptcy or financial crisis, customers may not be able to recover their funds through insurance claims. This is a significant consideration for anyone thinking of using BlockFi's services, especially given the recent instability in the crypto market.
While BlockFi does offer some security measures, such as two-factor authentication and allowlisting, these do not replace the protection provided by FDIC insurance. Additionally, while BlockFi claims that its custodian, Gemini, holds the majority of its crypto in cold storage to keep assets safe, this does not guarantee the safety of customers' deposits in the event of a financial collapse.
It is worth noting that there are companies, such as Nexus Mutual, that offer insurance on BlockFi deposits. However, this insurance comes at an additional cost, and it may not cover all potential risks associated with depositing funds on the platform. Overall, while BlockFi may offer attractive features, the lack of FDIC insurance is a significant factor that potential customers should carefully consider before entrusting their assets to the platform.
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BlockFi's custodian, Gemini, has its own insurance
BlockFi is a crypto exchange that offers its customers bank-like services. It is considered very safe, with only 5% of assets deposited with BlockFi actively held by the company. The remaining 95% of assets deposited with BlockFi are held and stored by its primary custodian, Gemini.
Gemini is a fiduciary and qualified custodian under New York Banking Law. It is licensed by the State of New York to custody digital assets. As a regulated New York State Trust Company, Gemini is a fiduciary and qualified custodian under New York Banking Law, and customer funds held on Gemini are held 1:1 and available for withdrawal at any time.
Gemini maintains insurance for certain types of losses. As of March 1, 2024, Gemini maintains $125 million in digital asset insurance, consisting of $25 million in commercial crime insurance for digital assets held in its hot wallet and $100 million in offline ("cold storage") insurance coverage for assets held.
In addition to its own insurance coverage, Gemini also offers a Custody Cover program through Nexus Mutual, which protects against the loss of funds for crypto assets held in a custodial account. In the event of a loss, customers can file a claim with Nexus Mutual and will need to provide proof of loss, such as account statements, screenshots of account balances, or support emails.
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Gemini holds the majority of crypto in cold storage
BlockFi was considered very safe, but the crypto deposited with them was not insured by FDIC or SIPC. Instead, BlockFi described a type of collateralization protection. Only 5% of assets deposited with BlockFi, which were in hot wallets for daily trading, were actively held by BlockFi and insured by Aon. However, the Aon insurance is only a crime policy that protects against certain types of unlawful theft and fraud.
Gemini, on the other hand, is a safe place to buy, sell, and store cryptocurrency. They are a fiduciary and qualified custodian under New York Banking Law and are licensed by the State of New York to custody digital assets. They have invested significant time and money in technical and control measures to help prevent losses and fraudulent activity. Gemini maintains $125 million in digital asset insurance for certain types of losses, including $25 million of commercial crime insurance for digital assets held in their hot wallet and $100 million of offline ("cold storage") insurance coverage for assets held.
Gemini's cold storage system includes multiple signatories being required to transfer funds out, with their CEO and President unable to individually or jointly transfer customer funds into or out of their hot wallet or cold storage system. They also offer additional protections for large crypto holders, such as segregated addresses and the ability to prevent assets from being sent to unknown addresses.
Gemini's private keys, used to sign cryptocurrency transactions, are custodied off-site in secure, guarded, and geographically distributed facilities. They use multi-party technology, role-based governance protocols, and multiple layers of biometric access controls and physical security to safeguard client assets.
Overall, Gemini provides a safe and secure option for individuals and institutions looking for a regulated, trusted, and qualified custodian to store their cryptocurrency holdings.
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Aon insures Gemini, but it's only a crime policy
Aon, a London-based global professional services firm, provides insurance coverage for Gemini, a leading digital asset exchange founded and owned by the Winklevoss twins. Gemini's user agreement discloses a third-party commercial crime and specie insurance policy for digital assets in its custody held in hot wallets. This insurance policy is designed to protect against certain types of unlawful theft and fraud. However, it's important to note that this coverage is specifically for crimes and may not provide broad protection for depositors in the event of other types of losses.
Gemini has recognized the gap in insurance coverage available in the crypto industry compared to traditional financial markets. By collaborating with leading insurance brokers like Aon, Gemini has been able to enhance its insurance capacity and obtain access to broader insurance markets. This has resulted in increased insurance coverage for its customers, with Gemini Custody™ now offering $200 million in insurance coverage, the largest limit purchased by any crypto custodian globally.
Gemini's insurance coverage for digital assets is an important step towards consumer protection, asset storage, and secure transactions on the Gemini platform. This coverage provides an additional layer of security for individuals and institutions interacting with cryptocurrencies, which have become increasingly popular but also vulnerable to theft and hacks. By addressing this critical need, Gemini is helping to move the crypto industry forward and gain wider adoption.
However, it's worth noting that the insurance provided by Aon for Gemini is specifically tailored to cover criminal activities, such as theft and fraud, and may not extend to other types of risks or losses. As such, while Aon's crime policy offers a level of protection for Gemini's customers, it may not provide comprehensive coverage for all potential scenarios. Therefore, individuals and institutions interacting with Gemini's platform should carefully review the terms and conditions of the insurance policy to understand the extent of their protection.
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BlockFi describes a type of collateralisation protection
BlockFi is a crypto exchange that offers its customers bank-like services. It offers crypto trading, a crypto rewards credit card, a crypto wallet, and crypto interest accounts in some countries. However, it is important to note that BlockFi is not a bank or a broker, and therefore, the assets inside its BIAs are not protected by FDIC or SIPC insurance. This means that there is no federally-backed insurance protection for deposits made into BlockFi accounts.
BlockFi describes a type of "collateralization" protection, which essentially means over-collateralization. In simple terms, if a borrower wants to borrow Bitcoin from BlockFi, they would need to have an equivalent amount of money in their own Bitcoin as collateral. BlockFi will then analyse the credit risk of the borrower and their intended use of the borrowed Bitcoin to determine how much Bitcoin the borrower needs to put up as collateral. This can be more than the amount the borrower wants to take out. For example, if a borrower wants to borrow $100,000 worth of Bitcoin, BlockFi may require them to put up $125,000, $150,000, or $200,000 of their own Bitcoin or other collateral. This collateral is held by BlockFi while the borrower uses the borrowed Bitcoin.
In the event that the borrower fails to pay back the loan, their collateral remains on the platform and can be used to cover the loan. This type of protection is different from traditional insurance and does not provide coverage for all types of risks, such as internal business risks or hacks. While BlockFi does provide insurance against hacks through its custodian Gemini, it does not provide insurance against loans that default.
It is worth noting that BlockFi has never lost any customer funds, and in the event of a compromised account, they freeze the account for one week. Additionally, Gemini, BlockFi's custodian, uses numerous security practices, such as holding the majority of crypto in cold storage, to keep assets safe. However, the recent turmoil in the crypto market has affected the stability of crypto lending platforms, including BlockFi, highlighting the risks associated with investing in these assets.
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Frequently asked questions
No, BlockFi deposits are not FDIC or SIPC insured. BlockFi is not a bank or broker, and assets inside its BIAs are not protected by FDIC or SIPC insurance.
BlockFi does not provide insurance against loans that default. However, they do offer protection through collateralisation or over-collateralisation. This means that if a borrower wants to borrow Bitcoin, they will need to have the same amount of money in their own Bitcoin. If the borrower fails to pay back the loan, their Bitcoin will still be on the platform. BlockFi also provides insurance against hacks.
Yes, there are third-party companies that offer insurance on BlockFi deposits, such as Nexus Mutual, which charges 2.6% APY.
