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Insuring Bitcoin Transactions

Not a day has gone by this year that a Bitcoin story hasn’t made the news. It’s a new concept, it potentially brings a lot of risk to business and it is here to stay. Even if Bitcoin disappears, it seems likely some brand of cryptocurrency will survive.
 
The main draw of Bitcoin (which we will use to reference all cryptocurrency) to businesses is ultra low transaction costs. If a website wanted to charge readers a fraction of a cent to read a story it’s currently impossible with credit card transaction fees. If customers come from overseas, it gets even more complicated and expensive. As the world continues to flatten and economies transcend borders a government neutral currency like Bitcoin appears to be the only logical method of transacting payments.
 
As insurance brokers we help our clients identify risk and create plans to avoid, mitigate or transfer it. If a firm decides to accept Bitcoin payments we see two major issues – regulatory exposure from the government and risk of theft of the digital currency. The insurance market is traditionally very slow to address emerging risks, a recent Business Insurance article predicts insurance carriers will start putting serious thought into the issue in the “next year or two”. Following is our opinion on how current insurance policy wording could respond to Bitcoin related causes of loss.
 
Regulatory Exposure
 
How Bitcoin will be regulated is still undecided. The anonymity of the transactions makes it difficult to defend allegations of money laundering, which are of increasing interest to the Justice Department. Several government organizations have asked the IRS to rule on it’s Bitcoin position but so far it has failed to do so.
 
Many global organizations are hoping that the high-profile failure of Mt. Gox will spur US-based Bitcoin exchanges to enhance their security and scrutiny of transactions. Some are even calling for increased regulation of Bitcoin exchanges in America so that the market will have a safe place to trade. All this leads to an increasing likelihood that some governmental oversight and regulation process is coming. When it does, this will give attorneys the opportunity to ferret out companies that are not in compliance or break the rules.
 
For companies, the risk caused by increased regulation is mitigated two ways. The first is to stay on top of all changes and laws surrounding crytocurrency. Engaging with a lawyer who is knowledgeable about the topic may be advisable if a significant amount of a firm’s transactions occur in Bitcoins.
 
The second risk mitigation technique is to purchase Directors and Officers insurance. Directors and Officers coverage, if properly structured, should provide defense coverage to any organization caught with an unexpected regulatory investigation or surprise allegation. It is important to note that not all Director and Officer Policies are worded the same. Companies should review their policy to ensure that there is broad coverage for regulatory investigations.
 
Theft Exposure
 
The theft of Bitcoins presents a unique problem for companies. As intangible assets, they cannot be locked in a safe for the night and are not currently insured with the FDIC while at a bank. Since Bitcoins are simply a mark in an electronic ledger, insurance policies do not adequately address the exposure. But we believe that there may be coverage granted even with existing language in policies carried by businesses today.
 
There appear to be four possible Property coverage grants for stolen Bitcoins – as “money”, “electronic data”, “digital assets” or “valuable papers and records”. These definitions comes from wording in a Fidelity (Crime) policy, Property policy, and Network Security (Cyber) policy. Each policy could potentially respond to a loss of Bitcoins.
 
Fidelity/Crime Insurance
 
Crime insurance has been around for decades and the insurance coverage forms are fairly standardized. Policy forms of this type provide coverage for a variety of loss or theft scenarios including employee theft, counterfeit currency, and even computer fraud. However, each policy only covers those actions when “money” or “securities” is stolen. In order to know if Bitcoin theft might be covered under a Crime policy, the first question to ask is whether Bitcoin meets the definition of “money” or “securities”.
 
Money is generally defined as “currency, coins and bank notes in current use and having a face value; and travelers checks, register checks and money orders held for sale to the public.” Bitcoins are obviously not coins or notes. They are not checks or anything tangible either. Might Bitcoin be included as “money” because it is a currency?
 
Bitcoin could meet the definition of “currency” and therefore potentially be included under a Crime policy. This is due to the fact that the term “currency” is not defined in a standard policy. Outside the United States, the governments of Canada and Japan (among others) have formally decided that Bitcoin does not meet the legal definition of currency and is instead a commodity like gold or silver. The UK is expected to define cryptocurrency as a voucher, which would make subject to the VAT. If a ruling in the US says Bitcoin is not currency it would give insurance companies strong standing to deny Crime claims for Bitcoin theft.
 
Property Insurance
 
If Bitcoin is ruled a commodity standard Property insurance would not provide coverage as its not physical business personal property. Insurance companies began to exclude property coverage for digital assets after a series of coverage suits by Hyplains Beef in the mid 1990s. Hyplains filed a Property policy claim for the business interruption caused by a faulty computer system, after the coverage suit played out most Property policies began to exclude electronic data and then offer sub-limited coverage by endorsement. These “electronic data” coverage extensions generally include “information reduced to an electronic format for processing with and storage in electronic data processing equipment” but exclude “valuable papers and records”. Valuable papers and records is often defined as “inscribed, printed or written documents, manuscripts and records including abstracts, books, deeds, drawings, films, maps or mortgages”. One could make the argument that Bitcoins are both electronic data and valuable records.
 
Network Security Insurance
 
Cyber liability, a newer coverage with nonstandard policy wording, has come in to offer Property insurance for loss of “electronic data” or “digital assets” from a hacking event. However, almost all policies exclude money and securities. If Bitcoin is ruled a currency, a hacking loss is not covered under Cyber. If Bitcoin is determined to not be legal currency there is the possibility of coverage. Companies can buy large Crime policies to cover the theft of money but meaningful coverage for electronic data theft is only available under Cyber insurance.
 
Emerging Risk
 
The insurance industry tends to be reactionary and the first stolen Bitcoin coverage case will likely be litigated for years. When this happens insurance companies will likely either begin to exclude coverage for Bitcoin theft or clarify one of the policy definitions to explicitly include it. Our advice is that for the time being companies accepting Bitcoin should attempt to purchase Crime, Cyber Liability and possibly Property coverage from the same carrier to lower the chance of conflicting coverage grants.
 
Bitcoins and other crytocurrency present an exciting frontier in risk management. The advantages of accepted and advancing the Bitcoin space is clear, but the risks are just starting to emerge. For firms to protect themselves adequately from the exposures listed, each company should purchase Directors and Officers insurance, Crime insurance, Property coverage and a Network Security policy. Until the insurance industry reacts to this changing environment with new policy language clarifying how Bitcoins are to be perceived, these insurance policies will offer the best risk mitigation while accepting Bitcoins for business.

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