Orlando Harmon
Coinbase has insurance in the event of a security breach, such as a hack, and customers' funds are protected by crime insurance policies. However, it is not an FDIC-insured bank, and digital currency is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC). Coinbase Custody has expanded its commercial crime coverage over an eight-year period, and the company claims to have the largest commercial crime policy covering hot wallets in the crypto sector. This insurance covers up to \$255 million for coins held in hot wallets, which are online and susceptible to hacks. It's important to note that Coinbase's insurance covers only a fraction of the total crypto value they hold, and individual accounts are not covered in the event of a personal account hack.
| Characteristics | Values |
|---|---|
| Insured by FDIC | No |
| Insurance for customers in case of a security event | Yes |
| Insurance for customers in case of company bankruptcy | No |
| Insurance for customers in case of individual account hack | No |
| Maximum insurance cover for coins in hot wallets | $255 million |
| Percentage of customers' assets in hot wallets | <2% |
| Insurance for theft of fiat currency and digital assets from Prime Trading and Vault services | Yes |
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What You'll Learn
Coinbase has insurance for customers' cryptocurrency
Coinbase has revealed that it has insurance coverage of up to $255 million for cryptocurrencies held in "hot wallets," which are online and more vulnerable to potential hacks. This insurance covers theft of fiat currency and digital assets, providing protection in the event of a security breach. However, it is worth noting that Coinbase holds less than 2% of customers' assets in hot wallets, with the remaining majority in "cold storage," which is offline and considered more secure.
For U.S. customers, Coinbase holds U.S. Dollar funds in pooled custodial accounts at FDIC-insured banks or NCUSIF-insured credit unions. This allows Coinbase to make a claim against pass-through FDIC or NCUSIF insurance for each customer up to a certain limit (currently $250,000 per depositor). This pass-through insurance protects customers' funds in the event of an insured financial institution failing.
While Coinbase has expanded its commercial crime coverage over the years, it is important to remember that its insurance covers only a fraction of the total crypto value it holds. Additionally, individual account holders are responsible for their account security, and Coinbase may not cover losses due to individual account hacks. Therefore, customers are advised to be diligent and consider their risk exposure when using any crypto custody provider, including Coinbase.
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Coverage is up to $255 million for coins in hot wallets
Coinbase has taken out insurance for up to $255 million for coins held in hot wallets. This means that in the event of a security breach, such as a hack or theft, customers can be compensated for their losses.
Coinbase's Chief Information Security Officer, Philip Martin, announced the news on April 2, 2019, stating that the insurance covers funds in hot wallets, which are essentially online and vulnerable to potential hacks. The hot wallet cover is provided by the crime insurance market, which covers "value in transit". This type of insurance traditionally covers the theft of physical items like cash in ATMs and armored cars, but in the context of crypto, it covers losses due to hacking, insider theft, and fraudulent transfer.
The insurance policy is held through Lloyd's registered broker Aon and is sourced from a global group of US and UK insurance companies, including certain Lloyd's of London syndicates. Lloyd's of London acts as a marketplace where multiple brokers pool together and share the risks.
It is important to note that Coinbase holds less than 2% of customers' assets in hot wallets, with the remaining majority in cold storage, which is considered more secure as it is offline and at arm's length from third-party attacks.
While the insurance provides some peace of mind for Coinbase users, it is important to remember that it may not cover all potential losses. The coverage is limited to $255 million, and in the event of a significant security breach, the total losses could exceed this amount. Additionally, as stated in Coinbase's legal section, "Coinbase is not an FDIC-insured bank and digital currency is not insured or guaranteed by the Federal Deposit Insurance Corporation ("FDIC"), the National Credit Union Share Insurance Fund ("NCUSIF"), or Securities Investor Protection Corporation ("SIPC"), and may lose value."
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Cold storage is safer than hot wallets
Coinbase is not an FDIC-insured bank, and digital currency is not insured or guaranteed by the Federal Deposit Insurance Corporation ("FDIC"), the National Credit Union Share Insurance Fund ("NCUSIF"), or the Securities Investor Protection Corporation ("SIPC"). However, Coinbase does have insurance in the event of a security breach, but it only covers a small fraction of the total crypto value they hold.
Cold storage wallets are safer than hot wallets in terms of security. Cold wallets are not connected to the internet, so they are less vulnerable to online hacks or theft than hot wallets. Cold wallets are hardware storage devices that keep your data offline, whereas hot wallets are connected to the internet for easy access. Cold wallets are ideal for those who don't need frequent access to their crypto and want to keep their private keys secure.
Hot wallets, on the other hand, are digital cryptocurrency storage systems that are continuously connected to the internet, providing users with convenience and accessibility. They are similar to online banking apps, always ready for transactions. However, because they are always online, they are more susceptible to hacking.
While cold wallets offer superior security, they require more investment to set up than hot wallets. Cold wallets also require a physical device and multiple security steps to confirm transactions, making them less user-friendly. Hot wallets, being accessible on smartphones, tablets, and PCs, offer convenient features like fingerprint authentication, QR codes, and advanced transaction fee customization.
It is common for users to maintain multiple wallets, such as a hot wallet for everyday transactions and a cold wallet for long-term secure storage. This allows for a balance between convenience and security. Ultimately, the choice between a hot wallet and a cold wallet depends on personal preference and the user's short-term and long-term goals for their cryptocurrency.
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Coinbase's insurance doesn't cover individual account hacks
Coinbase does have insurance, but it is important to understand the limits of this insurance and what it covers. Coinbase is not an FDIC-insured bank, and digital currency is not insured or guaranteed by the Federal Deposit Insurance Corporation ("FDIC"), the National Credit Union Share Insurance Fund ("NCUSIF"), or the Securities Investor Protection Corporation ("SIPC"). This means that in the event of a large-scale security breach or theft, Coinbase's insurance may not cover all customer losses.
Coinbase's crime insurance covers a portion of the digital currencies held across its storage systems against losses from theft, including cybersecurity breaches. However, it is important to note that Coinbase's insurance does not cover any losses resulting from unauthorized access to individual or business accounts due to a breach or loss of credentials. In other words, if your Coinbase account is hacked because your login information was compromised, Coinbase's insurance will not cover your losses.
The responsibility for maintaining the security of login credentials falls on the user. Coinbase recommends using strong passwords and taking the necessary precautions to protect their accounts. While Coinbase's insurance may provide some level of protection against large-scale security events, it is not a guarantee that all funds will be recovered. Total losses may exceed insurance recoveries, and funds may still be at risk.
For U.S. customers, Coinbase combines customer balances with funds from other customers and holds them in custodial accounts at U.S. financial institutions. These custodial accounts are FDIC-insured or NCUSIF-insured, providing coverage of up to $250,000 per depositor. This pass-through insurance protects funds held on behalf of Coinbase customers in the event of a failure of the insured financial institutions where Coinbase maintains these custodial accounts. However, it is important to note that this insurance coverage is contingent on Coinbase maintaining accurate records and the determinations of the relevant federal regulator at the time of a receivership.
In summary, while Coinbase does have insurance, it is essential for users to understand that their individual accounts are not insured against hacks or breaches resulting from compromised login credentials. Users should take the necessary steps to secure their accounts and be aware that their funds may still be at risk, even with Coinbase's insurance policies in place.
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Coinbase isn't FDIC-insured, unlike banks
Coinbase is not an FDIC-insured bank. Digital currency is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC). If Coinbase itself goes bankrupt, those funds (USD) are not FDIC-insured since Coinbase isn't a bank. FDIC pass-through insurance protects funds held on behalf of a Coinbase customer against the risk of loss should any FDIC-insured bank(s) with which they maintain custodial accounts fail. Coinbase is not FDIC-insured itself. If the company where you hold your money goes out of business, then your money is gone, and you will not get it back.
For U.S. customers, Coinbase combines balances with the balances of other customers and holds those funds in custodial accounts at U.S. financial institutions and/or invests those funds in liquid U.S. Treasuries, USD-denominated money market funds, or other permissible investments in accordance with state money transmitter laws. These custodial accounts have been established to allow Coinbase to make a claim against pass-through FDIC or NCUSIF insurance for each customer up to the per-depositor coverage limit then in place (currently $250,000 per depositor).
Pass-through insurance may be available to protect funds held on behalf of a Coinbase customer against the risk of loss should any insured financial institution(s) where they maintain custodial accounts fail. It is important to note that pass-through insurance coverage is contingent upon Coinbase maintaining accurate records and on determinations of the relevant federal regulator as a receiver at the time of a receivership of a bank or credit union holding a custodial account.
Coinbase has insurance if they are hacked and lose some of the crypto they are holding for customers. However, their insurance covers only a small fraction of the total crypto value they hold. If a hack/theft is significant enough, they will not have the funds to cover all customer losses.
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Frequently asked questions
Yes, Coinbase has insurance for up to $255 million for coins held in "hot wallets", i.e., assets that are online and susceptible to hacks. However, it's important to note that Coinbase is not an FDIC-insured bank, and digital currency is not insured by the Federal Deposit Insurance Corporation (FDIC).
Coinbase's insurance covers theft of fiat currency and digital assets from Prime Trading and Vault services. It also covers physical damage or loss of private keys in cold storage.
Yes. Coinbase's insurance covers only a small fraction of the total crypto value they hold. In the event of a large-scale hack or theft, they may not have sufficient funds to cover all customer losses. Additionally, Coinbase states that total losses may exceed insurance recoveries, so funds are still at risk.
Coinbase has a unique system of actively managed hot and cold wallets, allowing them to adjust protection levels based on transaction needs and security parameters. This dynamic approach provides financial protection against various potential security threats.
No. Coinbase's insurance covers losses due to security events, but it does not cover individual accounts if they are hacked. It is the responsibility of the account holder to secure their account and funds.
