Cryptocurrency is finding wide acceptance among banks, investors and even retail consumers. Risk management in this sphere has proven difficult, as insurers struggle with defining and quantifying risk as they would for a building, an M&A deal or cargo ship.
What’s more, reports of cybercrime, fraud and technological errors in cryptocurrency have not reassured insurers.
Specie insurance offers coverage for cryptocurrency held in a certain type of storage. It has a long history, especially in the precious metals market, where it was used to protect gold-miners’ claims when putting a stake in a property.
Specie insurance is also used to insure other high-value commodities such as gemstones, as well as art collections and other high-end items.
The idea behind specie insurance is to cover an asset at a specific location, such as a private gallery or the site of a miner’s claim. Because it traditionally applies to one location only, insurers can provide higher levels of property coverage than for other types of crime insurance.
The connection to cryptocurrency
Cryptocurrency is traded using digital “wallets,” which are partially online, making them vulnerable to hackers. Unlike with a checking account, when a hacker compromises a digital wallet, the cryptocurrency holder, or the company holding the wallet on the consumer’s behalf, is stuck with any losses. There is no bank or regulatory authority to help.
Cryptocurrency holders can eliminate this risk by storing their tokens offline, in “cold” storage. Cold storage requires putting their digital wallet on a device unconnected to the internet, such as a hard drive, USB key, offline computer or a device specially designed to hold cryptocurrency.
When in cold storage, cryptocurrency is considered to be in a secure location — which makes it available for specie insurance.
Shifting the burden of proof
However, one critical aspect of specie insurance is that, unlike liability insurance, the onus of proof is on the insured, who must prove a loss when making an insurance claim (this is true of most crime insurance).
How does this play out? It’s unclear, as there are few — if any — claims being made on cryptocurrency specie insurance. Before buying specie insurance for crypto coverage, cryptocurrency holders, whether those are investors, brokerages, exchanges, or custodians, need to feel confident that they can prove losses should they need to make a claim.
The blockchain provides a public ledger of all transactions, which seemingly provides proof of loss, as the cryptocurrency moved from one account to another. However, in the traceable but pseudonymous world of the blockchain, things are far more complex and proving losses is not always simple.
Risk management is a must
Before buying a specie policy, investors must realize the onus will be on them to prove losses.
They need to think about operational risk management procedures that can help them prove losses, not to mention prevent losses in the first place.
Expertise in the field is critical to making sure that cryptocurrency holders can get the right risk management tools and insurance — whether that’s specie insurance or other coverages.
HUB International experts can help you navigate the tricky world of cryptocurrency and risk management.