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The Rise of Cryptocurrency Exposes New Risks, Liabilities

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Cryptocurrency’s shift into the mainstream was validated on Super Bowl Sunday, when fans watching the Feb. 13 event were so engaged with a commercial by the cryptocurrency exchange platform Coinbase that the company’s website temporarily crashed. Coinbase aired a 60-second ad featuring a bouncing QR code that, upon being scanned, brought fans to a promotional site offering $15 in free Bitcoin for new users and the chance to enter a $3 million giveaway.

Although it reportedly caused some confusion, the commercial brought in more traffic than the company had ever encountered, its chief product officer said. It was one of multiple cryptocurrency ads to air during this year’s Super Bowl.

“They paid almost $14 million to have that spot, and that one 60-second commercial crashed their website,” said David Derigiotis, Corporate Senior Vice President, National Professional Liability Practice Leader, Burns & Wilcox, Detroit/Farmington Hills, Michigan. “Having multiple crypto-related companies put up the money to have all of those eyes on them during the Super Bowl is probably going to propel cryptocurrency even more into the mainstream than it has been over the last couple of years. There has been major growth within the space.”

The blockchain and the adoption of crypto is so different from anything that many have experienced before.

- Neil Gurnhill, CEO, Node International

The volatile yet enticing currency has been in the news regularly, from the announcement of the world’s first NFT restaurant in New York City to a billion-year-old black diamond that recently sold at auction for $4.3 million in cryptocurrency. This surge in popularity, however, means new areas of risk for individuals and businesses that get involved — and the need for insurance products to address those risks.

“The blockchain and the adoption of crypto is so different from anything that many have experienced before,” said Neil Gurnhill, CEO, Node International, London, England. “If any person or business chooses to get into the crypto world and they do not have a good comprehension of what it does, how it works, how to transact it securely, and what to look out for when it comes to being scammed, then I think they are taking a very big risk.”

‘Almost everybody’ may eventually use cryptocurrency

As of November 2021, about 16% of U.S. adults said they had invested in or traded cryptocurrencies, according to a Pew Research survey; among ages 18 to 29, the figure was 31%. In 2015, only 1% of Americans said they had ever collected, traded or used Bitcoin. In Canada, cryptocurrency ownership grew from about 3% Bitcoin ownership in 2016 to 14% cryptocurrency ownership in 2021, an Ipsos survey found. It also showed that 1 in 4 Canadian adults was considering a crypto purchase in the future.

Companies, too, are getting in on the cryptocurrency explosion. For example, Tesla, Square and Coinbase have made crypto investments totaling hundreds of millions of dollars, according to a December 2021 article by Decrypt. Among the latest companies to add crypto to its balance sheet is KPMG Canada, which explained in a press release that it believes crypto assets are a “maturing asset class” that will continue to grow and become a “regular part of the asset mix,” the Financial Post reported on Feb. 8.

“There is a tremendous amount of money pouring into this ecosystem,” Derigiotis said. “We are going to see more of that going forward, whether businesses are jumping in with both feet or just dipping their toes in.”

Keeping up with the speed of innovation and change surrounding cryptocurrencies is a challenge, Gurnhill said, and in some ways reminiscent of both the dot-com boom and the transition to contactless payments. “I think it has the same sort of pace, or it will over the next few years, where almost everybody is nearly forced to do it because the consumer is driving that demand,” he said. “If you cannot put it onto your balance sheet as a currency, then you cannot really accept it.”

As more businesses get involved in cryptocurrency, they should consider the associated risks and work closely with a specialized insurance broker to ensure they have the best available protections in place. While Cyber & Privacy Liability Insurance, Professional Liability Insurance and Directors & Officers Insurance can each address certain areas of cryptocurrency-related risk, “insuring crypto with crypto” may be the way of the future, Gurnhill said. This will increasingly be done through smart contracts, or digital contracts written in computer code and maintained on a blockchain.

“Some of the benefits that the blockchain and cryptocurrencies bring to businesses and consumers can be leveraged in the insurance world as well,” he explained. “When we are looking at our rollout of crypto-related insurance products, it is our desire that each one of them will be done on the blockchain using smart contracts. They will not be structured in the traditional sense. We will build products for those that have crypto exposure, and that could be for custodians of coins, financial advisors that advise on cryptocurrency, or simply for theft of coins.”

Simple mistakes could lead to crypto scams, fraud

Those who are new to cryptocurrency should be especially careful, as it can be “very easy” for cybercriminals to access your wallet or manipulate your purchases, Gurnhill said. “Like the ads on the Super Bowl, so many individuals may be knee-jerking into this, and it is unfortunately those who are very open to fraud and manipulation,” he said.

These individuals may be specifically targeted for scams and could prove to be easy targets because their assets are not stored as securely as they should be, for example. “They may not be as well-versed in this area and may make common mistakes such as failing to implement MFA, losing private keys to a wallet, or investing large sums of money without doing the proper research,” Derigiotis said. “That can result in lost fortunes, if they are not careful.”

When we are looking at our rollout of crypto-related insurance products, it is our desire that each one of them will be done on the blockchain using smart contracts.

- Neil Gurnhill, CEO, Node International

Insurance products are still evolving to address these personal risks. Cyberman365, a program offered by Burns & Wilcox in partnership with Node International, can provide identity theft and data leak response services but would not cover the theft of cryptocurrency assets, Gurnhill said. However, services may soon be available to help with recovery efforts after the coin goes missing.

“We are looking at doing an enhancement to that program where it might not cover the total loss, but it would still have the response mechanisms where a team of experts assists you in trying to recover that digital asset,” he said. “Sometimes it is a done deal and it is not recoverable, but sometimes it is.”

For businesses, Cyber & Privacy Liability Insurance remains an essential type of coverage for “any organization operating online,” Derigiotis said. For companies dealing with cryptocurrency, it is particularly important. In January, leading cryptocurrency exchange Crypto.com shared that 483 of its users were affected by a hack that caused $35 million in unauthorized withdrawals of Bitcoin and Ether, Forbes reported.

“[Crypto-related companies] may have huge assets, and like any financial institution there is a lot of value in the customer information and coins they are storing,” Derigiotis said. “They are a natural target for criminals, especially if they are an exchange or blockchain bridge which can facilitate the movement of hundreds of millions of dollars.”

With Cyber & Privacy Liability Insurance, cryptocurrency companies affected by a security incident can have access to a cybersecurity team to assess the situation and legal resources including privacy attorneys. “They can provide all the necessary resources such as access to legal counsel, which will be critical to maintaining attorney-client privilege, forensics, coverage for business interruption losses, system rebuilds and more,” he said. “Cyber & Privacy Liability Insurance can offer great value whether you are holding crypto, processing transactions or involved with blockchain technology, smart contracts, and decentralized finance (DeFi).”

Business owners will need to ask their broker whether their policy includes digital currency. “You want to make sure within the wording of your policy that theft of money will include digital assets,” Derigiotis pointed out.

Unfortunately, that may not be the case with many policies, Gurnhill explained, as theft of a digital asset is often excluded. “The new product we are working towards would address that,” Gurnhill said.

In addition, business owners may assume that any crypto-related loss will fall under their Cyber & Privacy Liability Insurance. “They may wrongly think that because it is a crypto risk, therefore it is a cyber liability risk. Whilst there are elements of it, in the true light of day, I think that is a wrong assumption,” Gurnhill said. “They have to really look at the product.”

New technology puts directors and officers, professionals at added risk

In December, Forbes reported that data analytics company MicroStrategy, which reportedly owns more Bitcoin than any corporation in the world, invested $94.2 million more into the currency. This type of increased institutional investment will likely add to the validity and popularity of these currencies, Derigiotis said, but these decisions should prompt important discussions between businesses and their insurance brokers about Directors & Officers Insurance. This type of policy can cover a company’s directors and officers, and the firm itself, in the event they are named in a lawsuit.

“Directors and officers are responsible for properly running their organization and having all of their investors, clients’ and employees’ best interests at heart,” Derigiotis said. “If a decision is made to purchase Bitcoin and you are investing company resources into that, and then the price drops significantly just as we have seen over the past few months, investors may say that was a poor decision. You can be held responsible for harm caused to the organization by poor financial decisions.”

Professionals who work on cryptocurrency underlying technology should also review their insurance policies. Specialty insurance, such as Technology Errors & Omissions (E&O) Insurance, is critical for these individuals and can cover financial losses resulting from a negligent design or an error in a technology product. This includes anyone involved in app development, cryptocurrency transactions, blockchain technology development or NFT projects.

“If it causes financial harm to a third party, that is what these policies are designed to address,” Derigiotis said. “If the marketplace relying on your technology goes down for example, that can be a huge business interruption loss. You could be held liable for that. Examples could include a smart contract programed incorrectly that does not allow lending, borrowing or investing to take place or a vulnerability in a blockchain bridge where digital assets are compromised. Anybody who is developing technology or getting involved in it has to be very careful.”

Solutions are also in the works for financial advisors who work with cryptocurrency, which can be a challenging sector when it comes to accessing insurance, Gurnhill said. “Quite often, they have really struggled to find coverage because they are speaking about cryptocurrency and that is still very new and many insurers will not touch them for coverage,” he said, adding that Node International has a program forthcoming for these professionals.

In the meantime, professionals should be certain whether any exclusions in their current policies apply to cryptocurrency-related work. “A gray area can be very expensive when managing a claim,” Gurnhill said. “Anybody in the crypto custodian or advice area certainly wants to make sure that they are clear on whether their policy will respond.”

Businesses seeking insurance for crypto-related risks will likely find that insurance carriers are selective and will want to see strong risk management procedures in place. “They also need to demonstrate that whatever their interaction is with cryptocurrency or the blockchain, whether it is storage, advice, or project management, that they cannot just use insurance as blind risk mitigation,” Gurnhill emphasized. “The insurer’s job is to make sure you are fit to be insured and are doing everything by the book. They should work with a broker and insurer who understands crypto risk, and not see insurance as a means of pure risk mitigation.”

For businesses and individuals alike, truly understanding your risk is a crucial first step, as cryptocurrency is “not like the traditional financial system,” Derigiotis added. “Once the transfer is done and the money leaves your wallet, it is gone. There is no reversing it back. Because it is decentralized, meaning there is no central authority like a bank or a government that controls it, there is no one you can turn to if there is a loss of that money. You are on your own, so you have to protect it properly, store it properly, and understand the risks involved with it.”

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