Are DFTs insurable? – Assurance

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The NFT market is still relatively new and volatile, but its potential is enormous. Christie’s successfully auctioned an NFT linked to a work of art for over $ 69 million in March, proving that NFTs are a new asset class that can have significant value. A value that needs protection like any other asset class.

Therefore, the question arises as to whether DFTs are insurable. What is the legal situation in Austria?

Are NFTs insurable under Austrian Insurance Law?

The first question to be answered is: when does Austrian insurance law apply? For insurance contract law, the applicability may first result from a choice of law. When there is no choice of law, or when an area of ​​law is involved that is not accessible to a choice of law, such as insurance supervisory law, the applicable law is more difficult to determine. : The central factor of conflict of laws rules – “insured risk” – is difficult to define for NFTs, as NFTs do not have a traditional “location”.

However, it is questionable whether the non-specific location of NFTs alone leads to a conflict of laws, in particular when an Austrian policyholder wishes to insure his NFT with an insurer domiciled in Austria, because:

  • international and European regulations on conflict of laws (such as Article 7 of the Rome I Regulation1) require a link with the law of the various states; and
  • such a clear link cannot be identified in a DTV insurance contract concluded between an Austrian policyholder and an insurer domiciled in Austria.

Consequently, it could be argued that a contract of insurance on DTV concluded between an Austrian insurer and an Austrian policyholder is a purely national matter, to which Austrian insurance law is applicable.

But even in the event of a conflict of laws, Austrian insurance law would apply if the insurer and the policyholder have their registered office / habitual residence in Austria because:

  • in EU law, the determination of the insured risk is, in case of doubt, based on the habitual residence of the policyholder (art. 7 (6) Rome I in conjunction with art 2 (2) of the second directive 88/357 / EEC); and
  • Outside the scope of the Rome I Regulation, Article 35 of Austrian Private International Law (“IPRG”) stipulates the applicability of the jurisdiction in which the contractual party providing the service characteristic of the contract has its habitual residence. In the case of insurance contracts, this is the head office of the insurer.

So as intermediate outcome, we can say that Austrian law is applicable to insurance contracts on NFT if:

  • it is legally chosen by the parties; Where
  • the insurance contract is concluded between an Austrian insurer and an Austrian policyholder.

As a next step, it should be considered whether NFT insurance is permitted under Austrian Insurance Law. Austrian law does not define “insurance”. According to case law, an insurance contract requires the following:

  • a risk;
  • a transfer of this risk to an insurance company; and
  • remuneration, that is to say a bonus.

In determining whether NFTs are insurable, the element of “risk” is essential. An insurance contract is intended to protect the policyholder against the consequences of the occurrence of a risk. In other words: Without risk, there is no insurance.

Where are the risks in NFTs? And can we measure them?

NFTs are one-of-a-kind digital assets. As with cryptocurrencies, NFTs are stored in a blockchain. While anyone can explore the blockchain record to view the underlying asset, only the NFT holder has the “private key” that verifies ownership. Therefore, the holder of the NFT is recorded as the owner of the underlying asset, unless the NFT is transferred to another person’s digital wallet. Once an NFT transaction is performed and assigned a different private key, no one can roll back the transaction: “Not your private keys, not your NFTs”.

This is where one of the main risks of NDT lies. Owning an NFT requires a digital wallet containing “private keys” to transact on the blockchain. If you lose access to the digital wallet by forgetting passwords, damaged devices or due to NFT hacking of your digital wallet may be lost. Most recently, users of the NFT marketplace “Nifty Gateway” claimed that their entire NFT collection was “stolen“.

Another risk of NFTs is that they usually contain a link to the location where the underlying asset is stored. If that link is broken or the company storing the asset goes bankrupt, the owner of the NFT could end up with links to assets or files that no longer exist. Similar risks arise if a digital marketplace, storage wallet provider, or server farm involved in an NFT transaction experiences bankruptcy or service disruptions that damage digital files.

Other risks associated with NFTs include whether the seller had the necessary intellectual property rights associated with the digital asset. What if the creator or seller of the underlying asset fails to secure or verify the necessary trademark or copyright?

These are all risks to which investors are potentially exposed in NFT transactions and for which protection can be considered. The question of whether NFTs carry insurable risks can therefore be answered with a categorical yes.

The following types of NFT insurance cover are possible:

  • Crime coverage; and
  • Coverage against loss or damage.

Crime coverage could be provided for theft or fraud related to hacker attacks and be structured in the same way as cybercrime insurance policies offered by some Austrian insurance companies.

The damage or loss coverage could cover any broken links, software errors or financial problems of the various entities involved in the NFT transaction which results in damage or loss of NFT.

In conclusion, TVNs are primarily insurable. However, the Austrian Insurance Supervision Law imposes an additional requirement for insurance and this requirement is the reason why the insurance market has been very reluctant to provide cover for digital assets and NFTs in particular, which ” currently no insurance company in Austria covers:

We are talking here about a calculation based on the law of large numbers in the underwriting of risk. The law of large numbers is a probabilistic prediction on the future development of damage: the greater the number of people, goods and material goods covered that are threatened by the same risk, the less influence of chance. The objective is an equalization of risks in the collective. This assumes the calculability of risk.

With the NFT market still in its infancy, it is hardly surprising that this requirement is difficult to meet. The market is also volatile, creating another problem: in an insurance policy for classic works of art, the turnover or the purchase price are options for valuing the work. But with NFTs and cryptocurrencies this value fluctuates and without a trading history there will be valuation issues.

However, for insurers looking for new business opportunities, entering this market early could give them big advantages to exploit its enormous potential. We closely follow the evolution of the insurance market and will keep you informed of its evolution.

Conclusion

NFTs are insurable in accordance with Austrian Insurance Law. However, digital assets in general and NFTs in particular raise a number of insurance-related questions, especially with regard to their valuation, which is why there is not yet an insurance offer for consumers. NFT. However, due to the great market potential of NFTs, we assume that it is only a matter of time before the first insurance companies take a pioneering role and provide cover for NFTs.

Footnote

1 Regulation (EC) n ° 593/2008.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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