Bitcoin: Is Being ‘Bitten’ Inevitable if you Bite?

The cryptocurrency industry is poised to become a ‘big opportunity’, according to experts, and insurers are increasingly exploring coverage within a new space engaging more of us.1 If online wallets, hot and cold storage and crypto-exchanges could become part of your world, however, you need to understand the risks – and not just from an investment point of view.

For the most part, when we speak about cryptocurrency, we are referring to Bitcoin as the most recognisable (other crypto currencies are available) – a digital money that is sent online and a form of payment that uses blockchain technology to send data in cyberspace. This is something which has been with us for over a decade, and often negatively associated with ransom payments to cyber criminals.

However, Bitcoin is actually becoming a go-to trading option for millions worldwide, if they fit a certain investment risk profile. People now use Bitcoin to pay for goods ranging from software to holidays and luxury cars, even superyachts.

Bitcoin is an investment for people who want a spread of investments across normal stocks and shares, property, art and jewellery collections, and other investment opportunities. Investors tend to be those who can afford to lose money. This is largely because Bitcoin is so volatile, with three-figure price swings not uncommon.

In some parts of the world, including Turkey, Nigeria and Bangladesh, Bitcoin is banned. In China, financial institutions are forbidden from using Bitcoin in payments or as settlement for insurance or financial services transactions. The US Treasury is worried about it facilitating tax evasion, and is monitoring this carefully. It is legal in the UK, France, Germany and

Italy, and generally throughout the EU, subject to different rules on how it is traded and taxed.

Here in the UK, Bitcoin exchanges are regulated by the Financial Conduct Authority (FCA), which also licences (UK) and regulates Bitcoin ATMs, of which there are more than 250 across Britain, the largest number of automated teller machines in a European country.2 It is legal to buy and sell cryptocurrencies, although these are not classed as legal tender and the trading of cryptocurrency derivatives, such as crypto futures or crypto options, is banned.

The risks of Bitcoin are not just investment-focused, however. A crypto wallet is not as secure as a bank account but suffers the same sort of phishing attacks, seeking account access. Whilst money stolen from a bank account might be recovered, it is not possible to reverse a transaction, if a crypto wallet is breached and the assets stolen. Cryptocurrency exchanges are also targets for thieves, with Lloyd’s of London warning of server-side security as early as 2015.

Things have moved on, however. Recognising Bitcoin’s potential to become mainstream, Lloyd’s syndicate, Atrium, in conjunction with Coincover, launched a new liability insurance policy for Bitcoin in March 2020, intended to protect cryptocurrency held in online hot wallets, against theft and malicious hacks. The policy was the first of

its kind and always indemnifies the insured for the underlying value of their managed asset, even if this fluctuates over the policy period. This is thanks to a dynamic limit that rises or decreases in line with the price changes of crypto assets. The policy is backed by a panel of other Lloyd’s insurers, including TMK and Markel, who are members of the Lloyd’s Product Innovation Facility (PIF).3

In Switzerland, AXA is now also accepting Bitcoin payments for all but life insurance policies, becoming the first large insurer to take Bitcoin for premium payments. The drawback

is that any midterm cancellation of a policy will not see any refund coming back to the insured.

Clearly, Bitcoin has attractions for some. TESLA’s CEO, Elon Musk, is considering crypto payments and balancing the benefits against the environmental impact that producing a Bitcoin can have. The University of Cambridge Bitcoin Electricity Consumption Index states that the global bitcoin network currently consumes about 80 terawatt-hours4 of electricity annually4, roughly equal to the annual output of 23 coal-fired power plants.

This could be wholly at odds with the stronger commitment to Environmental, Social and Corporate Governance (ESG) principles that the world of financial services is making. Yet whilst other eco-friendlier cryptocurrencies exist, they are nowhere near as mainstream.

1 https://www.investopedia.com/news/cryptocurrency-insurance-could-be-big-industry-future/ 

2 https://www.coinfirm.com/blog/uk-cryptocurrency-regulations/ 

3 https://www.lloyds.com/news-and-insights/product-innovation-facility  

4 https://finance.yahoo.com/news/much-energy-does-bitcoin-163557524.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&- guce_referrer_sig=AQAAAAD1uGjw1nLaBoGjMuVYEka1i0g0I-lU7RR3s29zrLSye8DUSAPhSjn2D7lT1BQVNACpdackNkaSeARrVl5Sq4SmUz4mPaUg3lC_ 45tyNvXgPwDBO-B1uPQEV0XGb6_uqzaGiKdJND1JmtPHfnZF97Pkuwd8DY8ISCB3g8PsfV5m