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Insurance Risks Of Cryptocurrencies

Posted by Jeffrey Forbes on May 19, 2016 7:18:02 PM


Cryptocurrencies continue to gain steam, both in terms of customer usage and mainstream acceptance.  Estimates place the daily value of bitcoin transactions at approximately $289 million.  Hundreds of thousands of merchants now accept bitcoin as valid payment.  And Bitcoin is just the most popular of these new currencies.  Yet with the transition to increased usage of cryptocurrencies come new risks on which businesses need to educate themselves. 

Businesses Adopt Cryptocurrency To Lower Transaction Costs

Cryptocurrency enthusiast and adopters tout the ability of these currencies to lower transaction costs.  Currently, most non-cash transactions have costs that can range in the 2 to 3 percent range (especially for credit card transactions), but these costs can also be significantly higher when dealing with additional complications.  Reducing transaction costs to tenths of a percent offers the possibility for merchants to increase profit margins while lowering prices.  However, like any financial system, cryptocurrencies face certain threats - some universal to all financial systems and some unique to cryptocurrencies. 


With The Benefits Are Some Risks

A major concern for businesses choosing to do business in cryptocurrencies is embezzlement.  Most cryptocurrencies operate through the combination of a private key and a public ledger.  The public ledger of the currency records the entire chain of title for that particular “coin.”  The last entry of the ledger is the current owner.  To transfer title and add a new name to the end of the ledger, one must use the private key of the current owner.  A business of sufficient size operating in cryptocurrencies must presumably have several employees able to access that key for transferring those bitcoins.  Since the employees would often use a single key, tracing which employee may have embezzled the funds introduces new difficulties. 

Because bitcoins are meant to mimic cash in several respects, losses like hardware failure on a “cold” bitcoin wallet (one not connected to the internet) or forgotten passwords can be catastrophic.  Nor are bitcoin transactions reversible, unlike credit cards or most electronic banking transactions.. Bitcoins lost in this manner are irrecoverable - lost forever.

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Calculate The Risk With Help From Your Broker

Companies can manage some of these risks through insurance.  While most commercial crime policies will not cover bitcoins or other cryptocurrencies in their standard form, endorsements are available from specific insurance companies to expand the traditional coverage.  Businesses should also talk to their insurance providers, brokers, and/or agents about potential insurance policies to cover bitcoins from hardware failure and similar losses. 

However, there are risks against which companies can take little protective action at this point in time.  Exchange failures like the Mt. Gox hacking of September 2014 resulted in the loss of millions of dollars worth of customers’ bitcoins.  Additionally, Bitcoin’s value has been extremely volatile over the course of its lifespan, often gaining or losing a hundred dollars in exchange value over the course of a few months. 

While certain companies have worked on creating bitcoin futures to allow the possibility of hedging, these come with their own risks given the newness of cryptocurrencies.

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Topics: Technology, For Your Business