Last Updated 3/2/2023
Issue: Cryptocurrency is a virtual or digital currency which uses cryptography to verify and secure transactions without a third-party. Unlike traditional currencies, cryptocurrencies are largely deregulated, usually have no central issuer, and are not held or offered by major banks. Instead, cryptocurrencies are purchased and exchanged using a limited number of unregulated digital currency exchanges, such as Coinbase or Binance, and are often stored in users’ personal, encrypted wallets. Bitcoin, which began circulating in 2009, was the first cryptocurrency. Since its advent, public interest in cryptocurrencies has grown tremendously, with recent polls indicating that one in five Americans have invested in, traded or otherwise used cryptocurrency. The cryptocurrency market value has grown to more than one trillion dollars, according to the Wall Street Journal. There are now approximately 4,000 different cryptocurrencies available on 200 different cryptocurrency exchanges, yet Bitcoin remains the most popular and valuable cryptocurrency.
Overview: Given the growing public interest in cryptocurrencies and the lack of regulation where transactions occur, it’s not surprising that cryptocurrency markets can be rife with crime. Chainalysis, in its 2022 Crypto Crime Report, noted that "cryptocurrency-based crime hit a new all-time high in 2021, with illicit addresses receiving $14 billion during the course of the year, up from $7.8 billion in 2020." A few insurers have responded to these risks, and now cover certain losses in the cryptocurrency market.
There are various insurance tools, funds, and agencies that protect both individuals and exchanges in the cryptocurrency market. In 2018, the exchange, Binance, established the Secured Asset Fund for Users (SAFU), an emergency insurance fund which uses a percentage of trading fees in order to safeguard user funds. The exchange was hacked for 40 million dollars in 2019, but claims its investors were unaffected because of SAFU’s protections. Coinbase uses crime insurance to protect their assets from theft, including in cases of cybersecurity breaches. However, this coverage does not protect individual accounts from loss in cases of unauthorized account access due to a breach or loss of credentials.
Prudent cryptocurrency owners may consider it necessary to purchase their own coverage. The longstanding insurance and reinsurance market, Lloyds of London, has created products to protect cryptocurrency held in online wallets from certain losses and recently produced what it calls a “first of its kind liability policy”, which has limits as low as £1000, and protects from losses that have arisen from the theft of cryptocurrency held in online hot wallets.
Though insurance protections do exist for cryptocurrency, they are far from comprehensive, and generally won’t cover losses from issues such as market fluctuations, Ponzi-related schemes, direct hardware loss, and cryptocurrency losses related to various blockchain failures. Some cryptocurrency advisers suggest that owners buy multiple policies to get maximum protection for their cryptocurrency, but this may be very costly for individuals.
The growing crypto market may also provide insurers with investment opportunities. Though given their extreme price volatility and speculative nature, cryptocurrencies are atypical investments for U.S. insurers.
Status: On May 20, 2021, the Statutory Accounting Principles (E) Working Group adopted INT 21-01: Accounting for Cryptocurrencies, which clarified that directly held cryptocurrencies neither meet the definition of cash in SSAP No. 2R—Cash, Cash Equivalents, Drafts and Short-Term Investments nor when directly held, meet the definition of an admitted asset per SSAP No. 4—Assets and Nonadmitted Assets. This INT does not address indirectly held cryptocurrencies captured in SSAP No. 30R—Unaffiliated Common Stock or SSAP No. 48—Joint Ventures, Partnerships and Limited Liability Companies. Those investments are admitted to the extent they comply with the requirements of those statements.
While the U.S. insurance industry’s exposure to cryptocurrencies is minimal, the NAIC Capital Markets Bureau will continue to closely monitor exposures to and acquisitions of cryptocurrencies as well as any related risks.