“Bitcoin plunge reveals possible vulnerabilities in crazy imaginary internet money” reads a recent headline in the satirical magazine The Onion. It neatly sums up the high-profile, rollercoaster ride that cryptocurrencies represent – and what many people think of them.
Yet, volatile and esoteric as it is, crypto business is proving to be irresistible to some insurers.
It’s a hard risk exposure for carriers to ignore. The market capitalisation of cryptocurrencies breached $3trn this month, boosted by demand for so called non-fungible tokens (don’t ask), such as artworks. Bitcoin itself surged to $66,000 in October, following the launch of the first US exchange-traded Bitcoin fund.
Financial lines and specie insurance markets see obvious opportunities for insuring crypto holders and investors, or covering the crypto businesses themselves.
Lloyd’s syndicate Atrium offers a liability policy to protect against losses arising from the theft of cryptocurrency held in online ‘hot wallets’. Meanwhile, US carrier Evertas has a product for cryptoassets and users of blockchain systems, addressing financial crime, tech errors and omissions, and D&O liability.
The Tel Aviv-based startup Curv, in tandem with Marsh and Munich Re, developed insurance protection for digital assets against theft from Curv’s own Institutional Digital Asset Wallet Service.
This month, OneDegree Hong Kong partnered with HKbitEX, the digital asset exchange, to offer protection for its sister company ON1ON’s custody platform. It said $100m of digital assets under management will be protected, making OneDegree Hong Kong the first Asian insurer to provide coverage for cryptoassets.
On the other side of the balance sheet, a handful of bold insurers have even invested in cryptoassets. One group of US insurers bought shares in digital currency investment vehicles offered by Grayscale Investments. The trusts track the prices of their cryptocurrencies using published indexes from CoinDesk LLC, Bitcoin Price Index or Ether Price Index, to calculate net asset values.
From an underwriting perspective, crypto is problematic for more conservative insurers, however. For an industry that relies heavily on models, its short history and high volatility is enough to set a CUO’s hair on end.
Bitcoin’s value has seesawed during the last year for bizarre reasons that include random tweets from Elon Musk and, more seriously, the Chinese government ordering a halt to cryptocurrency mining because it wanted to launch its own state-backed digital currency.
If that isn’t enough, the future of crypto is somewhat clouded by regulatory risk, adding another layer of uncertainty for the insurance industry. A number of crypto exchanges have fallen foul of supervisors around the world. The UK’s Financial Conduct Authority banned the Binance exchange from undertaking any regulated activity, for example.
The US Securities and Exchange Commission recently put the frighteners on Coinbase, which was planning to launch an interest earnings savings product. Now it’s turned its attention to DeFi, or decentralised finance, which is a platform for lending or borrowing digital money without any middlemen.
Last but not least in the list of reasons for insurers to shy away from the crypto sector is its carbon footprint. At a time when ESG criteria and benchmarking are moving up the agenda for re/insurers, the huge carbon footprint that is a by-product of cryptomining should ring alarm bells in the insurance CRO’s wheelhouse.
And yet… crypto’s allure continues to grow and fast-emerging markets cry out for insurance protection. They especially need it if, like crypto, they’re built on an unstable ecosystem where theft is rife.
But before carriers, fuelled by FOMO, rush in with financial crime and cyber coverage for crypto, they really need to ask if their underwriting expertise is up to it. At this stage in crypto’s development, pricing and reserving for “crazy, imaginary internet money” is a still a step into the largely unknown.