Austrian insurance law: Are NFTs insurable?

The NFT boom continues. After Christie's managed to auction an NFT linked to an artwork for over USD 69m this March, the original program code of the World Wide Web was also auctioned off as an NFT for USD 5.4m in the summer, proving that NFTs are a new asset class that can carry significant value. An asset that needs protection just like any other.

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

Are NFTs insurable according to Austrian insurance law?

Austrian statutory law does not define "insurance". Based on case law, an insurance contract requires:

• a risk;
• a transfer of that risk to an insurance undertaking; and
• remuneration, i.e. a premium.

To determine whether NFTs are insurable, the element of "risk" is essential. An insurance contract is intended to protect the policyholder against the consequences of the realisation of a risk. In other words: without a risk, there is no insurance.

Where do the risks lie in NFTs? And can they be measured?

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 holder of the NFT 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 made and assigned to a different private key, there is no way anyone can reverse the transaction: "Not your private keys, not your NFTs".

Therein lies one of the main risks of NFTs. Owning an NFT requires a digital wallet that contains "private keys" to transact on the blockchain. If you lose access to the digital wallet by forgetting a password, damaging a device or because you got hacked, NFTs from your digital wallet can be lost. Just 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 storage location of the underlying asset. If that link is broken or the company storing the asset goes out of business, the owner of the NFT could be left with links to assets or files that no longer exist. Similar risks arise if a digital marketplace, storage wallet provider or a server farm involved in an NFT transaction go bankrupt or suffer service interruptions that damage the digital files.

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

The law of large numbers

However, Austrian insurance supervisory law imposes a further requirement for insurance and this is why the insurance market has been very hesitant to provide coverage for digital assets and NFTs in particular. We are talking about a calculation based on the law of large numbers in the underwriting of risk. The law of large numbers is a probabilistic prediction about the future course of damage: the greater the number of persons, goods and material assets covered that are threatened by the same risk, the less influence there is from coincidence. The objective is a risk equalisation in the collective. This presupposes the calculability of the risk.

Since the NFT market is still in its infancy, it is hardly surprising that this requirement is difficult to meet. The market is also volatile, creating another problem: In a regular fine art insurance policy, the sales figure or purchase price are options to value the work. But with NFTs and cryptocurrencies, that value fluctuates, and without a trading history there will be issues regarding valuation.

Nevertheless, for insurers looking for new business opportunities, getting into this market early might have big advantages for exploiting its potential.

"In a regular fine art insurance policy, the sales figure or purchase price are options to value the work. But with NFTs and cryptocurrencies, that value fluctuates, and without a trading history there will be issues regarding valuation."

Conclusion

NFTs are insurable according to 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 no insurance offer for NFTs as yet. Due to the large market potential of NFTs, however, we assume that it is only a matter of time before first insurance undertakings take on a pioneering role and provide cover for NFTs.

authors: Peter Konwitschka and Daniel Höhnl