Does your Security Token Need Insurance?
Security tokens are digital assets that represent ownership in an underlying asset, such as a company or real estate. Like any other form of investment, security tokens are not immune to the risk of misappropriation of funds, theft, or ‘squeaky wheel’ investors. This is where insurance plays a role.
Issuers with the right insurance for security tokens protect themselves from investor claims among other risks. But Issuers can also leverage insurance to help protect investors against the loss of their assets due to malicious activities, such as misappropriation of funds, stealing of funds, or fraud. In the event that a security token Issuer is less than honest about their intentions with the funds, insurance can provide the opportunity for investors to have their principal investment returned. This can help to mitigate the financial impact of fraud while providing investors with peace of mind.. It is a significant and industry-specific benefit that creates value for everyone in the Security Token ecosystem and when referenced against other online or two-sided marketplace transactions, a massive breakthrough towards widespread industry adoption.
Companies, like Assurely, have entered the Security Token space to add protection to both sides of the transaction. Their TigerMark D&O Insurance covers the Issuer, but also uniquely includes policy language to return the loss of assets to the investor in the event of qualifying malicious activities such as theft or embezzlement. This insurance innovation from Assurely supports every stakeholder in the ecosystem and will be crucial to the long-term health of the Security Token ecosystem.
In one case, Assurely was able to satisfy a claim brought on by an investor when an Issuer raised ~$500,000 and ran off with the funds. The investor making the claim was able to receive her principal investment (less some minor expenses) back because the Issuer had a TigerMark policy.
An “everybody wins” scenario occurs here. Insurance on digital assets provides essential protections to investors and Issuers alike. It safeguards investors against many of the fears that come with investing in a blockchain based security and protects Issuers from squeaky wheel investors, investor-generated class action lawsuits, and other typical Issuer risks.
As more Security Tokens come to market, we will see how different projects take advantage of Insurance. Additionally, it will be interesting to see if any new insurance products come to market.
Please reach out to alec@securitytokenadvisors.com to discuss further. Alec Beckman is the Head of Consulting at Security Token Advisors and works with issuers, platforms, and blockchains to help move the industry forward.
