Paxos maintains digital custody insurance, including $300M in cold wallet coverage and competitive hot wallet coverage.
To provide further context, cryptocurrency insurance is issued by private insurance companies and is not backed by any government or government agency, and is not equivalent to Federal Deposit Insurance Corporation (FDIC) insurance or Securities Investor Protection Corporation (SIPC) coverage. As such, the coverage is subject to risk with respect to the creditworthiness of the insurers issuing the policies. However, it is important to note that Paxos has extensive controls in place to prevent loss or theft of the cryptocurrencies that it custodies for its customers, and these controls have been audited by an independent auditor, who has issued a SOC 2, Type II report with respect to those controls.
Paxos maintains two types of cryptocurrency insurance policies:
Crime: this type of policy covers “hot wallet” losses due to hacking, insider theft, and fraudulent transfers. A hot wallet is a means of storing cryptocurrencies that are connected to the internet and, thus, are at a greater risk of loss or theft. While Paxos seeks to maximize the amount of customer cryptocurrency that is held offline in “cold storage,” Paxos needs to maintain some amount of cryptocurrency in hot wallets in order to facilitate customer activity in a timely manner. Similar crime policies are also used to insure other financial assets against similar losses.
Specie: this type of policy covers assets held in “cold storage” and focuses on physical damage or loss of private keys, including from fires, floods, vandalism, earthquakes and other causes. Cold storage is a means of storing the private keys or tokens associated with a cryptocurrency on a device or in another physical form that is offline and not connected to the internet. Cryptocurrencies that are held in cold storage are subject to the risk of loss as a result of the destruction of the private keys or tokens. Similar specie policies are used to insure fine art or jewelry.
Importantly, these policies do not cover a client’s losses resulting from unauthorized access to their account resulting from a compromise of the client’s account credentials. We encourage all clients to use strong passwords on all of their personal devices, enable multi-factor authentication (MFA) on their email accounts, enable passcodes or MFA with their cell phone carriers whenever possible, and carefully monitor account notifications and transaction activity. Flourish requires strong passwords and MFA on all Flourish accounts, but it can be critically important to protect all of your personal devices and accounts.
The insurance policies that Paxos maintains only cover cryptocurrency assets that Paxos holds on behalf of customers and not customers’ U.S. dollars. U.S. dollars in Flourish Crypto Accounts are held or reinvested by Paxos through one or more of the following forms, and Paxos maintains full discretion as to which of these forms they use: (i) holding the U.S. dollars in one or more omnibus accounts at U.S. depository institutions (each, a “Bank”), (ii) investing the U.S. dollars in accounts holding debt instruments that are expressly guaranteed by the full faith and credit of the United States Government or money-market funds composed of such debt instruments, or (iii) converting the U.S. dollars in whole or in part to an equivalent amount of PAX Dollar (USDP) tokens or Binance USD (BUSD) tokens, which are tokens issued by Paxos and that are in turn are fully backed by U.S. dollars or debt instruments that are expressly guaranteed by the full faith and credit of the United States Government, held in segregated omnibus accounts. U.S. dollars held in Bank accounts will be eligible for FDIC insurance, subject to applicable limits, and may be held in excess of FDIC insured limits. As a result of the manner in which Paxos holds customers’ U.S. dollars, a portion of customers’ U.S. dollars may be eligible for FDIC deposit insurance coverage, subject to applicable limits, but it also possible, depending on how Paxos allocates customers’ U.S. dollars, that no FDIC insurance coverage will be available for such U.S. dollars. Therefore, customers should not rely on any amount of FDIC insurance coverage for the U.S. dollars that they hold in their Flourish Crypto accounts.