In the 18th Century, underwriting desks at what came to be known as Lloyd’s of London were developed to share or transfer risks associated with shipping. Availability of risk sharing, or insurance, provided protection for maritime investors and facilitated increased levels of investment and thus increased levels of maritime activity. Risk transfer has become an essential part of the development of a marketplace for many products.
In the early years of cryptocurrency, there were no insurance products specifically designed to cover cryptocurrency-related losses. Much like the presence of insurance fosters development of a marketplace, the absence of insurance hinders it.
This started to change in June 2014, when Great American Insurance Co. began insuring bitcoin losses and issuing bitcoin-specific endorsements covering criminal acts of employees. The underwriting process required, among other things, satisfactory responses to questions concerning audits of internal control processes.
While early crime policy forms were silent concerning virtual currency, this changed in 2015 when the Insurance Services Office (an entity charged with drafting policy language for the insurance industry) developed a Commercial Crime Policy form which broadly excluded any form of “virtual currency.” Contemporaneously, it created a “Virtual Currency as Money” endorsement which revised the definition of money to include virtual currency but required the policyholder to provide a schedule listing the cryptocurrency to be covered and subject to sublimit.
Also in 2015, The Bitcoin Financial Group LLC created The Bitcoin Insurance Agency which it touted as the first insurance and financial services company specifically created to handle the insurance needs, from the routine to the unique, of companies in the bitcoin industry. It offered a “Bitcoin Theft Insurance” policy covering any act, error or omission of the insured which resulted in theft of insured bitcoins or their related private keys. This coverage extended to hot and cold storage.
The following year, Elliptic Enterprise Ltd. created Elliptic Vault which stores bitcoin in cold storage. Keys needed to access the bitcoin are encrypted and stored offline where they were protected with layers of cryptographic and physical security, and are only accessible to a quorum of Elliptic’s directors. It was insured for loss or theft of bitcoin holdings by Lloyds companies.
Products were not limited to the US and UK markets. Later in 2016, Mitsui Sumitomo co-developed an insurance product, bitFlyer, with the Japanese Bitcoin exchange. It covered damages and losses caused by hacking incidents, unauthorized access, other cyber-attacks, human error and impropriety by employees. The product was available for the domestic Japanese bitcoin market and also covered costs incurred while dealing with international lawsuits.
Nor was coverage limited to the traditional vehicle of insurance policies. There has even been a kind of crowdfunding “insurance” issued through Nexus Mutual Decentralized.
It bears note that it is commonplace in the insurance industry for new insurance companies to be created when product prices peak; reliance on these sorts of new companies, however, may present its own risks.
Since then, the marketplace has continued to expand both in terms of available insurance companies and products as discussed in the next section.
This is the fourth post in the Blog’s Digital Asset Insurance Coverage series.
This post is an excerpt from an article written by Scott DeVries, Jessica Cohen-Nowak and Adriana Perez that originally appeared in the Journal on Emerging Issues in Litigation published by Fastcase Full Court Press, Volume 2, Number 4 (Fall 2022), pp. 255 – 276 (a comprehensive list of all references is provided in the published journal version).