Digital Asset Insurance Coverage Series, Part 4: History of Insurance Coverage Specifically Designed for Cryptocurrency

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At 18e Century, the underwriting offices of what came to be known as Lloyd’s of London were developed to share or transfer the risks associated with shipping.[1] The availability of risk sharing, or insurance, offered protection to maritime investors and facilitated increased levels of investment and hence levels of maritime activity. Risk transfer has become an essential part of market development for many products.

In the early years of cryptocurrency, there were no insurance products specifically designed to cover cryptocurrency-related losses. Just as the presence of insurance favors the development of a market, the absence of insurance hinders it.

That began to change in June 2014, when Great American Insurance Co. began insuring bitcoin losses and issuing bitcoin-specific endorsements covering employee criminal acts.[2] The underwriting process required, among other things, satisfactory answers to questions relating to audits of internal control processes.[3]

While early crime policy forms were silent regarding virtual currency, this changed in 2015 when the Bureau of Insurance Services (an entity responsible for writing policy language for the insurance industry) developed a commercial crime police form that broadly excluded any form of “virtual currency”. At the same time, 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 a sub-limit.[4]

Also in 2015, The Bitcoin Financial Group LLC established The Bitcoin Insurance Agency, which it touted as the first insurance and financial services company specifically created to handle routine to one-time insurance needs. companies in the bitcoin industry.[5] It offered a “Bitcoin Theft Insurance” policy covering any act, error or omission by the insured that resulted in the theft of the insured bitcoins or their associated private keys. This coverage extended to hot and cold warehouses.

The next year, Elliptical Company Ltd. established Elliptical vault which stores bitcoin in a cold room. The keys needed to access bitcoin are encrypted and stored offline where they have been protected by layers of cryptographic and physical security, and can only be accessed by a quorum of Elliptic administrators. He was insured against loss or theft of bitcoin holdings by Lloyds companies.[6]

Products were not limited to the US and UK markets. Later in 2016, Mitsui Sumitomo co-developed an insurance product, bitFlyer, with Japan’s Bitcoin exchange.[7] It covered damages and losses caused by hacking incidents, unauthorized access, other cyber attacks, human error and employee irregularities. The product was available for the Japanese bitcoin market and also covered costs incurred while processing international lawsuits.

Coverage was also not limited to traditional vehicle insurance policies. There was even some kind of crowdfunding “insurance” issued by Nexus Mutual Decentralized.[8]

It should be noted that it is common in the insurance industry for new insurance companies to be created when product prices peak; However, using these types of new companies can present its own risks.

Since then, the market has continued to grow 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 article 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), p. 255 – 276 (a full list of all references is provided in the published version of the review).

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