As more businesses begin investing in cryptocurrency and accept it as a form of payment, a rapidly growing insurance market has emerged to address the myriad of risks associated with the digital currency. To learn more about cryptocurrency-related risks and insurance coverages, Crain’s Content Studio spoke with David Derigiotis, Corporate Senior Vice President, National Professional Liability Practice Leader, Burns & Wilcox.
What are some of the greatest risks associated with cryptocurrency?
D.D.: Number one is the price volatility. The crypto market has such wild swings, both upward and downward, so that must be considered for anyone getting involved in this space. Another is the current lack of regulation, but that may be changing soon as the White House issued its first executive order on cryptocurrency recently. There are no protections in place, unlike the traditional financial system, which is a risk for businesses and individuals. There is also a lack of understanding; many people blindly rush into this space because they move with the greater crowd. There is a significant amount of FOMO (fear of missing out) that commonly leads to investment losses.
What should business owners be aware of relative to these risks?
D.D.: A number of companies have decided to invest in cryptocurrency and add it to their balance sheet, including Tesla and MicroStrategy. If organizations want to get involved in accepting cryptocurrency as a form of payment, research has to be done. There are over 10,000 different cryptocurrencies, and there are tax implications associated with investing as well. The IRS treats virtual currency as property, and any gains made through liquidating assets must be reported as a taxable event. Organizations that adopt crypto payments differentiate themselves and reach a more global customer base, but again, it is volatile. Companies also need to consider the type of technology they will utilize to accept transactions and how they plan to track the price of the actual currency at the time of purchase.
What kinds of insurance policies can help them respond to these threats?
D.D.: There is crime coverage that is dedicated specifically to theft or loss of digital currency. Technology Errors & Omissions (E&O) Insurance is geared more toward businesses involved directly within the blockchain ecosystem, such as developing smart contracts or different protocols, decentralized apps (dApps), and other services within decentralized finance (DeFi). In some cases, they are moving hundreds of millions of dollars in cryptocurrencies back and forth. If there was an error in the code or a business interruption loss, that could fall back on the developer and be covered by Technology E&O Insurance. There is also Cyber & Privacy Liability Insurance, which can cover the fallout from cyberattacks, business interruption losses, theft of information and more. Directors & Officers (D&O) Insurance is another important component to this, as it can provide individual protection to board members and the company itself in the event of a lawsuit. For example, a company that puts Bitcoin on the organizations balance sheet may want to have financial protection in the event shareholders or investors allege a duty of care was breached following a material decline in the digital assets value. This space is evolving quickly. There are no uniform policy forms, no standard agreements that are in place; a lot of them are bespoke coverages specifically tailored by the carrier.
How can companies complement their insurance coverage from a prevention standpoint?
D.D.: Knowing that insurance options exist is a great first step. The beauty of operating in the crypto space is that there is no intermediary; you hold the control. There is also risk with it, so you have to understand the associated threats. For instance, anyone who self-custodies digital assets should make sure the seed phrase is kept private and securely backed up. Anyone with the seed phrase will have access to all the coins. If assets are stored on an exchange, make sure two-factor authentication is set up and use a unique email address specifically for that account. Consider enabling “allow listing” if the option is provided. This feature allows the account owner to specifically list wallet addresses where crypto can be transferred and will ban all other unrecognized addresses. This can further protect your investment in the event an account is compromised.
Can you provide any examples that would be illustrative of the risks we have been discussing?
D.D.: There have been over $1.2 billion in overall cryptocurrency losses in the first three months of this year, compared to $154 million the first three months of 2021. The ETH and Solana blockchain ecosystems have been the top two targeted by criminals. In one specific incident, more than $3 million worth of the popular NFT collection, Bored Ape Yacht Club was stolen after an Instagram account was hacked. It’s important to understand the individuals behind the projects you are investing in and what reassurances you have regarding security, financial strength of investors and possible insurance. This is like somebody hacking your bank account and taking all your money. You want the opportunity to have that exposure insured.
What are the greatest opportunities for brokers to get into cryptocurrency-related insurance products?
D.D.: It is the chance to be at the forefront of an emerging industry. Just like cyber and privacy risk was going back two decades, those individuals that got involved in that space and developed expertise were able to stand out — this is no different. This is a fast-growing and ever-evolving area. If you educate yourself and align with a firm that can help guide you, you have an opportunity to capitalize on a growing movement.
What advice would you give brokers to increase their success rates with these products?
D.D.: Know what solutions are available in the marketplace and align yourself with a wholesale broker that has expertise within the space so you can speak confidently to your clients about the risk management strategies or insurance options that can meet their needs. Continue to educate yourself on what is happening in the market, understand the technology and what projects are on the horizon.
What advice would you give brokers on targeting people to sell this coverage to?
D.D.: Anybody operating specifically within the cryptocurrency space would be the ideal target — smart contract and dApp developers, investors, mining operations, and anyone involved in DeFi projects. Even outside of that, many businesses are still touching the crypto ecosystem, and I think we will see a growing number of businesses that indirectly touch this space. They are also an ideal audience.
Cyber/Privacy/Technology Insurance
Why your clients might need it: Cryptocurrency is a rapidly-growing industry — organizations considering getting involved in the space should be aware of the types of coverage, such as crime coverage and Technology E&O Insurance, to protect themselves.
Protects against: Theft or loss of digital currency, a business interruption loss due to technology, and individual protection to board members and the company in the event of a lawsuit.
Expert opinion: “The crypto market has such wild swings, both upward and downward, so that must be considered for anyone getting involved in this space. Another is the lack of regulation. There are not the same protections in place with the traditional financial system, which is a risk for businesses and individuals.”
