Retailers are increasingly accepting cryptocurrencies as a form of payment for goods and services, but the volatile nature of the currency puts these businesses at risk.
The fluctuating value of cryptocurrencies like bitcoin could lead to overnight double-digit increases or decreases in currency value. Bitcoin, the most popular and widely used type of cryptocurrency, saw its prices fall by 75 percent to below $4,000 late last year, mostly because of its speculative nature.
That fluctuation is expected to continue in the months ahead. At least one finance professor even thinks that bitcoin’s value will eventually drop to zero.
The unpredictability of cryptocurrencies means there are few carriers that offer Cryptocurrency Insurance, which will cover cyber-related liability costs, technology errors & omissions claims, and electronic fund transfers that go wrong. Legal and investigation fees are often covered by a Cyber and Privacy Liability Insurance, but every policy is worded differently.
“The risks associated with cryptocurrencies are unique due to the asset class being indifferent to the broader economy, intangible, and traded without traditional intermediaries such as banks,” – David Derigiotis, Burns & Wilcox
Cryptocurrency related insurance costs more than most other types of business-related liability insurance policies, but can be a smart investment if goods and services are being paid for with bitcoin, litecoin, NEO or other such currencies. Potential policyholders should work with a broker or agent who has experience in this area, especially since such policies are highly customizable based on risk and client profile.
“The risks associated with cryptocurrencies are unique due to the asset class being indifferent to the broader economy, intangible, and traded without traditional intermediaries such as banks, said David Derigiotis, Corporate Vice President, National Professional Liability Practice Leader, Burns & Wilcox. “The dramatic swings in the currency value and security risks alone could threaten the viability of many businesses.”
Cyber and Privacy Liability Insurance covers the costs associated with managing a cyber breach or hack associated with a digital assets. This could include a cryptocurrency-related breach depending on how the policy is structured.
Initial coin offerings (ICOs) have received significant media attention in the past year as the value of many types of cryptocurrencies have fluctuated. These ICOs have many similarities to an initial public offering (IPO) typical for companies offering their stock to public investors for the first time. However, ICOs serve more as a crowdfunding tool for companies that have created a new currency, app or service. Businesses that invest in ICOs may also want to consider Cryptocurrency Insurance to help limit liabilities.
Meanwhile, more companies are actively involved in blockchain technology, with one August study conducted by PricewaterhouseCoopers pegging the number at 84 percent. Blockchain records transactions on a widely distributed public ledger, which eliminates the need for third party support and is supposed to be more secure. Yet despite the generally positive attention blockchain receives, it represents another risk factor, Derigiotis said.
Security is always a concern
Along with the instability, one risk for a business using digital money is a security breach. Security firm Fortinet warned in its August 2018 threat landscape report that cryptojacking software, which can hijack PCs and computing systems to work on behalf of the hacker, is one of the more damaging cyber security threats on the market today. The report continues that organizations that underestimate cryptojacking efforts are under a heightened risk of security threats.
While the value of cryptocurrency has fallen in recent months, bitcoin ATMs have been installed around the world, with one report estimating that there are at least 4,000 bitcoin ATMs globally. These ATMs post another security threat, as Bloomberg reported in December that they can be used to launder thousands of dollars at a time.
As a result, organizations currently dealing with cryptocurrencies – or even those considering it for the future — need to learn more about both Cryptocurrency Insurance and Cyber and Privacy Liability policies that could cover a security breach involving these digital assets, Derigiotis said. The exact number of companies that accept bitcoin or another type of cryptocurrency is hard to pinpoint, but the list is large, with such companies as Dish Network, Etsy, Expedia, Intuit and even Microsoft among them.
Once you have currencies like bitcoin, business owners need to store then somewhere. There are three different wallets that can store cryptocurrencies, offering a variety of different benefits and drawbacks. A custodian that controls a large number of wallets on behalf of its clients and software wallet stores on smartphones are two of the least secure cryptocurrency wallets and may be vulnerable to phishing and other attacks, Derigiotis said.
Hardware wallets — a physical device like a USB flash drive — may be more secure from an online standpoint, but it can be less practical and inconvenient.
There are additional risks as well. A University of Sydney (Australia) study in January 2018 estimated $72 billion of illegal activity involving bitcoin occurs around the world.
Questions businesses need to ask
One of the first things businesses need to analyze as they consider the role that cryptocurrencies may play in their own financial structure is their digital risk and online exposure. It is incumbent on organizations to do whatever they can to protect, store and process crypto payments securely, so they need to review their digital footprint with IT experts – and with their insurance broker.
“You need to ask yourself what would happen if your payment system went down,” Derigiotis said. “A broker’s role is to transfer that financial risk into an insurance vehicle that can help limit some of the liability.”
An internal cryptocurrency policy should be established to govern how it is used and managed within the organization. Both IT and financial teams should be heavily involved in the establishment and management of this policy because currency volatility and security issues can happen at any time.
“Work with your broker to walk through different scenarios and see if your policies can be expanded to cover certain currencies or unique situations.” – Derigiotis
That policy can overlap with a Cyber Insurance policy, which should include crypotcurencies within the definition of financial instruments, Derigiotis said. For example, if an organization transfers $10,000 worth of bitcoin because of fraudulent instruction, the policy needs to respond as if it were a traditional wire transfer and cover the loss.
“Work with your broker to walk through different scenarios and see if your policies can be expanded to cover certain currencies or unique situations,” he said.
Volatility impacted by governmental action
Some governments have already taken steps to protect their own currency or to generate tax policies on cryptocurrency transactions. Japan reportedly has created a new tax system that garners tax income for the government and limits profits on cryptocurrency transactions. However, other governmental entities are opening the door to businesses to use cryptocurrencies. Ohio began allowing businesses to pay taxes using bitcoin, in part as a way to attract blockchain start-ups.
The U.S. Treasury Department and the Securities and Exchange Commission view bitcoin and other cryptocurrencies as a security (tradable financial asset) rather than legal tender. Other agencies view it as a commodity. Cryptocurrency regulations are being discussed in Congress, which could help to define how such currency is regulated in the years ahead.
“Without such regulations in place, both consumers and businesses have less protection against wild fluctuations or other market abuses that could adversely affect their financial stake,” said Derigiotis. “You will want to proceed with caution and with as much protection as you can.”
As with any coverage need, an insurance broker or agent must be consulted. Click here to forward this article to your insurance broker or agent to ask if you need this coverage, or share this with clients to start the conversation and ensure proper protection.
This information was provided by Burns & Wilcox, North America’s leading wholesale insurance broker and underwriting manager. Burns & Wilcox works exclusively with retail insurance brokers and agents to assist clients like you with their specialty insurance needs. Ask your insurance broker or agent to review your Cryptocurrency or Cyber and Privacy Liability policies to ensure you have proper protection.