The unpredictable nature of crypto assets is compounded by slowly evolving regulation
As crypto assets such as cryptocurrencies and non-fungible tokens (NFTs) continue to gain in popularity, the issue of what measures insurers are taking to protect their clients from risks in this unpredictable environment emerges.
Since the advent of Bitcoin, insurance firms have grappled with the challenges posed by the unpredictable nature of crypto assets, compounded by slowly evolving regulations. Cyber crime, hacking, theft and fraud threats have been significant deterrents to coverage of digital assets gaining mainstream acceptance. Furthermore, the volatility and encrypted characteristics of digital assets make recovery of incurred damages from such risks a challenging endeavour.
As insurers contemplate providing insurance capacity for digital asset coverage, a specialised form of coverage traditionally used to insure high-value assets such as art collections is being considered: specie coverage.
Specie coverage is an important, lesser-known product insurers have used to cover portable items such as precious metals, numismatics and fine art, as well as crypto assets.
Where cyber security policies may cover ransomware attacks or hacking, specie coverage is often available to cover loss by theft or destruction of assets while in cold storage (storing cryptocurrency offline in a hardware wallet).
Because cold storage is offline, assets are more resistant to theft by hacking or phishing attempts. That said, like other precious assets, cryptocurrency remains susceptible to loss or damage from a variety of other perils.
The specific policy issued to crypto-based companies will continue to evolve as courts and governments provide companies with much-needed clarity.
Challenges in US and
As courts throughout the world deal with data custody issues in cyber breach cases triggering commercial crime and general cyber policies, insurers (and their counsel) should apply lessons learned to new crypto asset specie offerings.
For instance, recent holdings in the US have relied on the interplay between adequate custody and the importance an organisation places on cyber security best practices to determine the merits of claims and adequacy of pleadings. Insurers should pay keen attention to court interpretations as the number of crypto coverage claims increases.
In addition, a large percentage of crypto insurance litigation in the
In the US, the number of insureds filing coverage claims continues to grow and disputes arise from losses of digital assets under homeowner and even cyber policies.
For instance, in the case Atwal v
In
In Kimmelman v
Future of crypto insurance
Cryptocurrencies such as Bitcoin and Ethereum have exploded in value, but their prices remain volatile and difficult for insurers to underwrite. This is further complicated by thousands of "meme tokens" that are even more complex to insure. Apart from currencies, NFTs are also volatile assets with an added layer of complexity since some NFTs often act as "membership cards" or provide other value that is difficult to appraise.
To further complicate matters, legislation in the US has been slow-rolling. The
Lack of uniformity in regulation and judicial decisions highlights the need for comprehensive regulation in the US. With clear regulations, the ambiguity surrounding digital assets could decrease, allowing for more consistency in the market and reduced volatility, and insurers may feel less hesitant to underwrite digital asset coverage.
Alternatively, insurers may elect to transition from annual to monthly premium models, enabling insurance companies to better accommodate volatility, ensuring they can maintain pace with the rapidly shifting values of these assets. Such a shift would promote accurate pricing and flexibility and potentially foster greater trust between insurers and policyholders. However, asset security would need to remain a focal point, with cold storage being the preferred method.
As crypto assets become more mainstream, the number of claims brought under traditional homeowners' and cyber policies may increase, causing the courts to re-examine the policy language as it may apply to digital assets. As a result, insurers will be forced to account for these potential claims in their policy forms, whether they decide to afford coverage or to exclude it.
Until the crypto industry is allowed to neutralise its early setbacks, insurers will continue to create innovative products in the space, using existing policy frameworks to underwrite digital assets.
Originally published by Insurance Day Viewpoint.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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