Regulation has been a double-edged sword for cryptocurrency companies and insurers alike.
On the one hand, regulators have been clamping down hard on operators’ activities, most evidently in China, where cryptocurrency mining was banned across a swathe of provinces. The Chinese authorities have also mandated payment platforms to cease all dealings with cryptocurrency companies too, disrupting their operations further.
In the wake of all this, Bitcoin’s price has plummeted 50% from its April high, reflecting the currency’s sheer volatility.
This volatility has been fueled further by high-profile public announcements, most notably by Tesla’s chief executive, Elon Musk, who has tweeted his concerns about the widescale environmental damage caused by Bitcoin’s high energy consumption.
This has spooked many institutional investors, raising serious concerns about the credibility and legitimacy of cryptocurrency as an asset class, and has seen a cautious pace in the development of the deployment of large-scale insurance capacity.
Initially dominated by retail traders, cryptocurrency has cemented its status as an institutional asset class. However, the rapidly evolving regulatory environment governing cryptocurrency and the lack of clear legal and tax guidelines remain a major barrier to widespread adoption.
On the flipside, more jurisdictions have been establishing new regulatory and legislative frameworks to oversee cryptocurrency businesses compared with even just a year ago, with the US Office of the Comptroller of the Currency allowing federally chartered banks to legally provide custody of digital assets and settle transactions using public blockchains and stablecoins. And the insurance industry has seen the first steps in the development of workable regulatory frameworks as part of this.
Leading the way has been Bermuda, which introduced a new, innovation class (Class IIGB) of insurance business in 2019.
The new licence enables insurers to write cryptocurrency risks in a more transparent and efficient manner than ever before and, vitally, allows insurers to accept premiums and pay claims in cryptocurrencies, all under a legal and regulatory framework intended to remain up to date with technology, while protecting policyholders.
Reflecting this regulatory shift, the insurance market for cryptocurrency has started to take off in the past 12 to 18 months, with greater limits available from capacity providers for mainly the largest and most well-known risks.
As new capital flows into the space, the overwhelming demand for loss protection will result in increased limits and underwriting capacity, although the price and availability of insurance is likely to remain dependent on the type of business and specific line of coverage.
Unlike traditional carriers, cryptocurrency insurers do not have access to the historic data needed to quantify the present value of a future risk. Rather, they have to carry out extensive due diligence on prospects to enable them to tailor comprehensive policies with mutually beneficial terms.
However, small to medium-sized firms still face an upward challenge to obtain coverage for lines such as directors’ and officers’ (D&O) liability, which is essential in attracting credible board members and in the capital-raising due diligence process
At Relm we have helped many of these firms by working virtually face-to-face with management teams and their brokers to understand exactly the risk management processes they have in place and their mitigation strategies. Our innovative underwriting approach and digital expertise enable us to address the underserved demand for risk protection across a host of emerging asset classes.
Over the past year, we have analysed the risks for and written more than 250 policies in 20 countries for everything from pre-revenue start-ups to firms with market capitalisation valuations in excess of $10bn.
Our programmes have run the full gamut, ranging from D&O, cyber and professional liability, and errors and omissions to staking and smart contracts.
While we are excited by the progress we are making and delivering to the market, more work is needed.
Aside from regulation, among the biggest emerging challenges facing the cryptocurrency industry are environmental, social and governance (ESG) initiatives.
Visibility of proof of work networks has put greater pressure on firms to reduce their carbon footprint and adopt green energy policies, particularly where it comes to mining the currency.
Furthermore, institutional investors and publicly traded companies are uncomfortable and under shareholder and activist pressure to disassociate themselves from firms whose fossil fuel-dependent energy usage is at odds with many environmentally sustainable initiatives. This approach to investment is also a key consideration in the insurability of some crypto businesses that approach Relm.
Moving forward, however, investment opportunities for the sector abound. Despite Bitcoin’s price dropping below the previous yearly low threshold of $30,000 in July, there is still potential for prices to continue to fall yet further, possibly to $15,000, as the market begins to cool off over the next six to 12 months. In fact, this was an almost inevitable correction in the face of an unsustainable rise in value, particularly in some of the smaller currencies such as Dash and Meme coin.
However, the hope is the decline in runaway values will see a degree of stability enter the market, which will improve its credibility, legitimacy, and transparency in the face of greater regulatory scrutiny.
For investors, a lack of alternative retail investment opportunities, the devaluation of key global currencies such as the US dollar, the Federal Reserve slashing interest rates to near-zero, a trillion-dollar stimulus package pushing investors to hedge against inflation and Bitcoin establishing itself as an uncorrelated asset class are likely to continue its attractiveness among more traditional investors.
As the cryptocurrency industry matures, it will attract more sophisticated investors, most of which will demand protection against loss.
Insurers can take heart that cryptocurrencies are now firmly part of the financial market ecosystem and here to stay. While at Relm, as the only regulated cryptocurrency insurer under Bermuda’s Class IIGB, we remain pioneers in making insurance available to this class of businesses, the market as a whole needs to wake up to the opportunity that cryptocurrencies present and develop the insurance and risk management solutions the sector needs.
Expect to see increasing mainstream adoption and disruption of the financial system as capital continues to pour into cryptocurrency. Each new dollar invested will require loss protection and at Relm, we are committed to assisting this massively underserved market with viable risk management solutions.