More and more Bitcoin businesses are adopting mainstream practices and seeking insurance for their operations. A report by top insurance market operator Lloyd’s, published on June 12 and targeted at insurance service providers, highlights the key risk factors for the insurance of Bitcoin operations.
Lloyd’s, an insurance market located in London, is one of the best-known names in the insurance sector. It operates as a marketplace within which multiple financial backers come together to pool and spread risk. Lloyd’s itself does not underwrite insurance business, leaving that to its members. Instead, the society operates as a market regulator, setting rules under which members operate and offering expert advice and centralized administrative services to members.
The report suggests that the technology, procedures and practices that underpin Bitcoin are maturing. “Nevertheless, legitimate concerns remain over security risk and the potential for criminal exploitation,” notes the report. Lloyd’s does not, therefore, endorse the insurance of Bitcoin operations, but rather “aims to contribute to the assessment of these risks for insurance purposes.”
Lloyd’s shares a positive assessment of the benefits of Bitcoin, now widespread in the mainstream financial sector.
“In essence, Bitcoin offers a low-cost, relatively fast means to transfer value anywhere in the world; the only real constraint is the availability of an Internet connection. As such it offers a lower-cost alternative to established banking and money transfer systems, which require a bank account and/or the payment of fees,” states the report, adding that Bitcoin can bring global payment technology to populations unable to access or afford conventional banking methods.
These benefits could be significant for a wide range of users around the world. Insurance, according to Lloyd’s, can be a component of responsible risk management to enable the next phase of Bitcoin’s evolution.
At the same time, Lloyd’s is persuaded that the security risk of Bitcoin operations will never be reduced to zero. It can, however, be mitigated by the use of professional security measures and the adoption of recognized standards for secure bitcoin storage. The security measures required for Bitcoin should include both the physical and personal protection measures routinely applied for cash, and the cybersecurity measures required for sensitive data.
Lloyd’s also invites the Bitcoin community to cooperate with law enforcement to prevent Bitcoin from becoming “synonymous with crime” in the public perception.
The Lloyd’s report includes a thorough description, by Jerry Brito and Peter Van Valkenburgh of Coin Center, of operational risks associated with theft. Brito and Van Valkenburgh cover both local risk – the risk that thieves steal bitcoin from specific users or operators, and global risks – for example, 51 percent or Sybil attacks.
In conclusion, Coin Center advises that insurers and industry observers keep tabs on whether a business is employing modern controls such as multi-sig, cold storage and hybrid wallets.
Garrick Hileman, of the London School of Economics, and Satyaki Dhar analyze risks not related to malicious intent, including market volatility and regulatory uncertainty, which should be factored in when assessing the overall risks of Bitcoin operations. For example, European authorities have discouraged banks from transacting with bitcoin or interacting with Bitcoin companies, which has limited the ability of Bitcoin businesses to connect with the broader financial system and grow. The conclusion of Hileman and Dhar is that there are no clear solutions on the horizon for these risks.
It’s to be hoped that the publication of this report by a leading insurance expert will facilitate the consolidation of best practices in risk assessment, and help Bitcoin businesses in obtaining insurance for their operations.
Image via Lloyds.com