Given its popularity, it’s no surprise that banks and institutional investors are dipping their toes into the cryptocurrency market, whether that’s to act as custodians, create trading platforms, develop investment products or invest in cryptocurrency directly.
But with such a new sector, it’s unclear how to properly manage and insure risks that go beyond the inherent instability of cryptocurrency’s investment value.
That doesn’t mean financial institutions can’t protect themselves. There are several areas in which to do business in crypto, each with separate risks and risk transfer solutions:
- Crypto mining: Corporate computer processing facilities that facilitate the ongoing management of the blockchain as it evolves and receiving cryptocurrency in the process as payment.
- Crypto brokerages and exchanges: The platforms on which cryptocurrencies are bought and sold, and investors trade, deposit funds and register accounts.
- Custodians: Storage platforms that work as a virtual safe.
- Investment managers: The investment management platforms and investment product providers of such things as exchange-traded funds (ETFs), mutual funds, or hedge funds that allow investors to invest in cryptocurrency without directly buying Bitcoin, Ethereum or other cryptocurrencies.
- Financial infrastructure: The payment processors that facilitate the movement of cryptocurrency amongst the various operators in the blockchain and cryptocurrency ecosystem.
- Other digital assets: Using the same blockchain infrastructure, this class of assets includes non-fungible tokens (NFTs) that represent digital art, music and other electronic assets, such as “digital real estate.”
Risk and insurance in crypto
What all of these elements have in common is that they all shoulder fundamental risks, whether that’s cybercrime, the loss of physical property or the risk of litigation when operations go sour for financial institutions’ customers.
Perhaps at the top of many commercial company’s concerns is cybercrime, which can take the form of malware, ransomware or outright theft of the private keys that create digital signatures for verification purposes.
Obviously, it’s essential to have the highest level of security in these businesses, and while distinguishing between hot, cold and warm storage is vital during the insurance process, obtaining some crime insurance as a failsafe is recommended.
For those at the top of a cryptocurrency enterprise, risk against litigation is a major threat. Directors and Officers (D&O) coverage will help mitigate the risk; it’s easier for crypto mining companies to obtain compared with cryptocurrency exchanges, but D&O is available if you can properly position your firm’s risk with your insurance advisor.
Along the same lines, exchanges and custodians should consider Errors and Omissions (E&O) coverage. Like D&O coverage, there are capacity issues with E&O insurance for cryptocurrency operations, making it hard to obtain; most often, it is offered with a shared limit along with cyber insurance.
Specie insurance provides another form of protection and is used by many of the larger crypto custodians to buy large limits for cold storage. Specie coverage, which dates back to insuring gold mining operations in remote locations, is usually associated with covering hard physical assets, including gold and precious metals, core drilling samples, gemstones, fine art and currencies.
Specie insurance provides coverage that is limited to a specific location or in transit. That geographical limitation makes specie more affordable, which means insured limits can be much higher than for traditional crime coverage on cryptocurrency but only while in cold storage.
The need to find a partner
The cryptocurrency industry is a nuanced, evolving and specialized area. Unlike many other risks, crypto risks are highly technical and can be difficult to quantify.
As a result, insurance covering cryptocurrency risks is not easy to find and is very costly; insurers are still wrapping their heads around the market, and most are reluctant to offer coverage in any form.
Those caveats make it essential to find an insurance partner that has crypto expertise to help navigate this burgeoning market.
HUB International’s experts can help companies navigate the difficult journey of insuring cryptocurrency risks.