Q
Cryptocurrencies like bitcoin have been in the news, but what are they?
A
A cryptocurrency is a form of digital or virtual money. There are more than 700 cryptocurrencies in use around the world today, with bitcoin being the most recognized and widely used. This currency is unique in that there is no governing body or central authority regulating or backing its use. It serves as a true peer-to-peer trading system with no middleman, such as a financial institution, involved.
Q
What, in particular, should we know about them?
A
Cryptocurrency exchange rates are extremely volatile due to the relatively low volume of use. They are based on supply and demand—increased demand and wider acceptance drives the price per unit higher while less demand brings it down. For example, within the past few years, a single bitcoin has been worth $5 and more than $1,000. It fell below the $400 range early this year. Also worth noting, it doesn’t take a full bitcoin to make a purchase. The currency can be divided down to eight decimal places, with 0.00000001 being the smallest amount used during a single transaction.
Q
What are the insurance implications and the main risks?
A
The insurance marketplace is limited when it comes to available options and viable coverage solutions for cryptocurrency exposures. If the digital money is lost or stolen, it is gone, with the client bearing the financial burden. Losing virtual currency would be the same as losing a $100 bill from your wallet. The risk with cryptocurrency is magnified significantly for those who hold hundreds of thousands or even millions of dollars’ worth—there is no FDIC or other governing body insuring that loss as with our traditional financial system. In 2014, the most notable bitcoin exchange, which was based in Tokyo, Japan, suffered a security breach that resulted in a loss of more than 700,000 bitcoins with a value at that time of $409 million. The company subsequently filed for bankruptcy.
Coverage for this exposure will likely be found in well crafted cyber and crime policies. Hacking and theft pose major risks for those who actively use and store this form of currency. Although cryptocurrencies are not mainstream in our 21st century economy, some individuals, merchants and other businesses are beginning to use them. Only time will tell if digital currency can rival the U.S. dollar. But in the meantime, it is important to ask your clients if they use or accept this form of payment so you can develop a well-rounded risk management and insurance strategy tailored to their needs.
