Who can incur losses associated with cryptocurrency or digital assets? The real question is who uses them. 

Among the most obvious users would be exchanges in which cryptocurrency is traded. It has been reported that the largest insurance market in the cryptocurrency industry consists of exchanges that insure against thefts from cryptocurrency hackers. Among the more prominent exchanges are Coinbase, Crypto.com and Gemini. Similarly obvious are the third-party custodians that store cryptocurrency and other forms of digital assets on consumers behalf such as BNY Mellon Crypto Currency or Fidelity Digital Assets. They provide safekeeping of digital assets including keys and ensure accessibility. 

However, usage is far more expansive with the penetration of cryptocurrency and digital assets into the economy expanding in an almost parabolic manner since its inception. A 2020 survey released by HSB reports that “[a]t least one-third of U.S. small and medium-sized businesses accept cryptocurrency as payment for goods and services . . . with newer companies up to twice as likely to trade in digital credits.”[1] The survey adds that 59% of the companies that accept cryptocurrency also purchased it for their own use.[2] Deloitte reported by late 2020, more than 2,300 businesses in the United States accepted bitcoin.[3]  

Nor is market penetration limited to businesses. While a 2015 Pew Research Center survey reflected that 1% of the population “collected, traded or used” cryptocurrency, a survey conducted six years later, in September 2021, found the percentage had increased to 16%.[4] Given the demographic tilt of users with higher usage among younger adults (e.g., 31% of all adults between 18-29) reported in the survey, adult usage can be expected to continue increasing over time. This is all the more so given the increasing levels of mainstream and web-based advertising featuring personalities like Matt Damon (crypto.com) and Stephen Curry (FTX). 

Meanwhile, the risk of loss or liability associated with digital assets presents in many ways. 

Like stock trading, crypto-based asset investments risk a loss due to price fluctuation and market crashes. Loss due to price fluctuation will affect any individual or company that buys, sells, accepts or relies on cryptocurrency in any form. It also affects the value of NFTs that were previously sold at a significantly higher exchange rate.

However, the digital asset context also presents some very different forms of loss and liability. Loss on both small and large scales occurs frequently through hacking thefts. Relatedly, cryptocurrency exchange or wallet-security software companies are beginning to face liability for their failure to protect users (or quickly react) to hackers. Unsurprisingly, it has been reported that the largest insurance market in the cryptocurrency industry consists of exchanges that insure against hackers. However, the type of hack may affect whether the hacking victim has any recourse against the exchange or access to insurance. 

Particularly with respect to NFTs, a large portion of the recent litigation (and liability) in this industry concerns claims of intellectual property infringement.

These and other claims associated with digital assets may be covered under traditional and/or new insurance products, subjects addressed in later parts in this series.

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This is the second post in the Blog’s Digital Asset Insurance Coverage series.

This post is an excerpt from an article written by Scott DeVries, Jessica Cohen-Nowak and Adriana Perez that originally appeared in the Journal on Emerging Issues in Litigation published by Fastcase Full Court Press, Volume 2, Number 4 (Fall 2022), pp. 255 – 276 (a comprehensive list of all references is provided in the published journal version).  

[1] One-Third of Small Businesses Accept Cryptocurrency. Do They Understand the Cyber and Financial Risks?, HSB (Jan. 15, 2020), https://www.munichre.com/hsb/en/press-and-publications/press-releases/2020/2020-01-15-one-third-of-small-businesses-accept-cryptocurrency.html.

[2] Id.

[3] The rise of using cryptocurrency in business, Deloitte, https://www2.deloitte.com/us/en/pages/audit/articles/corporates-using-crypto.html (last visited July 12, 2022). See also Judy Greenwald, Some insurers accept premium payments in cryptocurrency, Business Insurance (Apr. 1, 2022), https://www.businessinsurance.com/article/20220401/STORY/912348700/Some-insurers-accept-premium-payments-in-cryptocurrency?ticks=637836230060262412&ticks=637836230060262412, reporting that the companies include insurance companies such as Universal Fire & Casualty Insurance Co. and Axa S.A’s Swiss unit. 

[4] Andrew Perrin, 16% of Americans say they have ever invested in, traded or used cryptocurrency, Pew Research Center (Nov. 11, 2021), https://www.pewresearch.org/fact-tank/2021/11/11/16-of-americans-say-they-have-ever-invested-in-traded-or-used-cryptocurrency/.