Since the peak of cryptocurrencies’ value at the end of 2021, cryptocurrency investors have sustained an estimated $2 trillion in losses. While some of the losses can be attributed to macroeconomic factors that have also impacted traditional finance (e.g., inflation, interest rates), the industry has also been rocked by a series of high-profile cybercrimes and cryptocurrency collapses that have erased the value of millions of customers’ investments. The recent insolvency of FTX, the fourth largest cryptocurrency exchange by volume, amid multiple counts of fraud against former CEO Sam Bankman-Fried, has raised questions about cryptocurrency’s future. Given the challenges of increased regulation, cybercrime, and other liability, the question arises as to what insurance, if any, will be available to participants in the market.
Although the available coverage will depend greatly on a company’s exposure to cryptocurrency, there are a number of products which are being offered that can address these liabilities. Note that, as there is no standard-form crypto insurance policy, the coverages, definitions, and conditions will vary from policy to policy. And what is important to one company may not be important to another. As such, it is important for companies to work with their CPAs, brokers and insurers to ensure that the policy offered is fit for the intended purpose.
Types of Coverage
Here is what is commonly available:
- Where the risk is protection of digital assets, insurers are offering products more akin to traditional crime insurance policies. These policies can afford coverage for losses caused by criminal or fraudulent activities, including computer fraud as well as employee theft and dishonesty.
- Cyber insurance can also provide coverage in connection with a cyberattack related to cryptocurrency, including: investigating, responding to or terminating a security breach; notification of the breach; recovery of lost or compromised data; network interruption; responding to cyber-extortion; repair of computer systems; crisis management firms to help contain the fallout from public disclosures of the attack; and/or liability arising from alleged failure to prevent a breach, including the costs of defending against claims by affected parties. The terms of a given policy will determine whether a cryptocurrency loss, itself, is covered.
- Directors and officers (D&O) coverage could provide coverage in connection with crypto-related claims, such as civil lawsuits, criminal proceedings, administrative proceedings and investigative demands. The terms of a given policy, however, will determine the scope of coverage and the applicability of any exclusions.
In addition to these coverages, other potentially applicable coverages (again subject to their terms) include professional liability insurance and property insurance.
This is an emerging space and one in which risk management and insurance will play a critical role in protecting the bottom lines of those exposed to the volatility of cryptocurrencies.