Bitcoin and other crypto or virtual currencies have created alternative payment methods and assets. Because these currencies are purely digital and hold a variable market value, insurance coverage for loss or theft of bitcoin presents both an opportunity and a challenge.
As a subset of alternative and digital currency, a virtual currency is a medium of exchange that uses cryptography to secure transactions and control the creation of additional currency units. Bitcoin is the most well-known virtual currency.
Virtual currencies use decentralized control—as opposed to centralized control, as in banking—which causes central banks of various countries lose control and regulation. This loss of control puts these currencies at odds with nation and state monetary control policies and practices. For businesses that accept bitcoin or other virtual currencies as payments, or hold them as investments, the impact could be extreme.
On March 25, 2014, the Internal Revenue Service (IRS) ruled that bitcoin will be treated as property for tax purposes, as opposed to currency—meaning bitcoin will be subject to capital gains tax. One benefit of this ruling is that it clarifies the legality of bitcoin. Investors no longer need to worry that investments in, or profit made from, bitcoin is illegal, or worry about how to report them to the IRS. Note that most countries’ central banks have either defined bitcoin as illegal or not a currency.
Bitcoin and virtual currencies can have positive impacts when it comes to insurance. They create a new class of asset to insure, and the value of premium payments may rise before they are converted to dollars. ISO already offers endorsements for bitcoin (CR2545 and CR2546).
The negative impacts, however, occur when your insured has a gap in coverage for loss of bitcoin with current policy forms. Plus, the value of premium payments may fall before they are converted to dollars.
In light of the IRS ruling, accepting bitcoin as a method of payment is the same as accepting other non-currency items, such as publicly traded stock certificates, gold or silver. Also, bitcoin is a high-valued type of property similar to jewelry or silver, although it’s intangible. Bitcoin theft is not covered under a homeowners or a business policy without special endorsements. In the wake of large documented thefts of bitcoin, customers should consider insuring against this risk.
The insurance industry has responded to virtual currencies very slowly. Still, the Great American Insurance Group recently added an endorsement to its existing business crime policy, and INGUARD accepts premium payments in bitcoin. Teambrella, a new peer-to-peer British insurance company, is currently launching with the goal of becoming the first decentralized bitcoin-based insurance company.
Ensure you and staff are aware of the basic bitcoin concepts and applications, and review your current customer base for possible impacts. If you have commercial clients using bitcoin, be sure to investigate a niche market for insuring bitcoin and other virtual currencies which are not yet a mature technology.
In the meantime, consider implementing these best practices:
- Educate your staff on this new asset category your customers may need to protect.
- Educate your customers on the lack of current insurance coverage for this asset class.
- Create a standard response if your agency is asked about accepting bitcoin as a payment method.
- Currently, ransomware hackers tend to demand payment in bitcoin as ransom. With this in mind, it may be worthwhile for your commercial clients and your own business to set up a small bitcoin account.
Duke Williams is founder of Simply Easier Payments, an electronic payment gateway, and EchoSage, a digital expert assistant.
This article is adapted from the Agents Council for Technology’s risk advisory on bitcoin, crypto and virtual currencies. View the entire Changing Nature of Risk advisory series online.