Digital asset risk and insurance opportunities: Clyde & Co

This episode of our Digital Transformation podcast series, hosted by Dino Wilkinson, focuses on the risks and insurance options of cryptocurrencies and NFTs (Non-Fungible Tokens). To explore this fast-moving area of ​​law and insurance, Wilkinson is joined by Georgia Amos, an expert in cyber risk, data and technology, along with Karen Boto, a partner in the insurance group specializing in emerging risks in fintech and insurance.

The episode begins by looking at the volatile rise of cryptocurrency, before diving into the increased demand for insurance companies to underwrite cryptocurrency assets and securities. The discussion then focuses on the risks associated with holding cryptocurrencies and why these make life difficult for insurance companies. Finally, guests explore the progress being made to protect clients in this area, and how the law and regulation are evolving to keep up.

Boto sets the stage by describing the “remarkable hype” around cryptocurrency and the volatility of the market since Bitcoin’s creation in 2008. Despite recent claims of a “crypto winter,” she says “…similar shocks have been seen before, and the market has always recovered.” Furthermore, recent innovations such as Central Bank Digital Currencies (CBDCs) and NFTs, combined with the high-profile FTX scandal and acceptance of cryptocurrencies by major financial institutions, mean that demand for specialist insurance cover is on the rise.

However, insurers are still hesitant to cover businesses directly related to cryptocurrencies – scared off by the price volatility and lack of regulation. Amos outlines the many risks facing companies that use and trade digital assets, the most important of which are losses from cybercrime, hacking, theft and fraud. Phishing attacks are one of the biggest threats and asset recovery is extremely difficult as they can be moved quickly and are largely untraceable.

Nonetheless, Boto says insurers are “tearing into this field … primarily offering commercial crime coverage for hacks and thefts, and custody coverage for offline or cold storage.” One example is the digital asset platform, BitGo, which recently secured over $700 million in cold storage insurance capacity from the London market.

However, many challenges remain, not least the question of whether cryptocurrency can be defined as “property”. Boto explores the progress made in this area, including a UK Jurisdictional Working Group and recent cybercrime case, ‘AA vs Persons Unknown’, both of which have taken the view that it is, thereby “providing property rights and remedies to victims of cryptocurrency crime.” But the continued lack of clarity means insurers are increasingly including policy exclusions to cover their backs.

When it comes to recovering digital assets, Amos compares the situation to “using data protection when cell phones were invented. It’s the question of applying ancient laws to very new technology.” There are steps in the right direction in using traditional property remedies, such as asset freezing orders and asset preservation orders, but the practicalities of recovering assets is still very difficult.

Concluding with a look at the future regulatory landscape, Boto discusses a hearing by the Legislative Commission, which was launched last year, to ensure that the law is fit for purpose. Amendments proposed include an explicit recognition of a third category of personal property, “data objects”, along with law reform that would enable courts to award remedies in cryptocurrency tokens where appropriate.

Boto believes that changes such as these will drive greater insurance opportunities and ensure continued innovation in the area, where “…there is a wealth of very credible, new companies, with good ideas that offer good services. With insurance support, they could go further on their journey.. . creating greater legal protections would really help.”

Listen to more episodes in the series