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This episode of our Digital Transformation podcast series, hosted by Dino Wilkinson, focuses on the risks and insurability of cryptocurrencies and NFTs (non-fungible tokens). To explore this fast-moving area of law and insurance, Wilkinson is joined by Georgia Amos, expert in cyber risk, data, and technology, along with Karen Boto, a partner in the insurance group who specialises in emerging risks in fintech and insurance.
The episode begins by looking at the volatile rise of cryptocurrency, before delving into the increased demand for insurance firms to underwrite cryptocurrency assets and securities. The discussion then focuses on the risks involved in holding cryptocurrencies, and why these make life difficult for insurers. Finally, guests explore the progress being made to protect clients in this space, and how the law and regulation are evolving to keep up.
Boto sets the scene by describing the “remarkable hype” around cryptocurrency and the volatility of the market since Bitcoin was created in 2008. Despite recent claims of a ‘crypto winter’, she says “…similar shocks have been seen before and the market has always recovered.” Further, recent innovations such as Central Bank Digital Currencies (CBDCs) and NFTs, combined with the high-profile FTX scandal and the acceptance of cryptocurrencies by large financial institutions, mean demand for specialist insurance cover is on the rise.
However, underwriters are still hesitant to cover businesses directly related to cryptocurrencies – put off by the price volatility and lack of regulation. Amos outlines the numerous risks faced by companies using and trading in digital assets, the most significant of which are losses arising from cybercrime, hacking, theft and fraud. Phishing attacks are one of the biggest threats and recovery of assets is extremely difficult, as they can be moved quickly and are largely untraceable.
Nonetheless, Boto says insurers are “tiptoeing into this field… primarily offering commercial crime cover for hacks and thefts, and custody cover for offline or cold storage.” One example is the digital asset platform, BitGo, which recently secured over $700m of cold storage insurance capacity from the London market.
Numerous challenges remain, however, not least the question over whether cryptocurrency can be defined as ‘property.’ Boto explores the progress made in this area, including a UK jurisdiction taskforce and recent cybercrime case, ‘AA vs persons unknown’, which have both taken the view that it is, thereby “giving proprietary rights and remedies to victims of cryptocurrency crime.” But the continued lack of clarity means insurers are increasingly including policy exclusions to cover their backs.
When it comes to recovering digital assets, Amos likens the situation to “applying data protection when mobile phones were invented. It’s the issue of applying age old laws to very new technology.” There are steps in the right direction in applying traditional property remedies, such as asset freezing orders, and asset preservation orders, yet the practicalities of recovering assets are still very difficult.
Concluding with a look at the future regulatory landscape, Boto discusses a consultation by the Law Commission, launched last year, to ensure that the law is fit for purpose. Changes proposed include an explicit recognition of a third category of personal property, “data objects”, along with law reform enabling the courts to award remedies in cryptocurrency tokens where appropriate.
Boto believes changes like these will drive greater insurability and ensure continued innovation in the space, where “…there’s a wealth of very credible, novel companies, with good ideas offering good services. With insurance backing, they could get further on their journey… creating greater legal protection would really help.”