Digital Asset Insurance Coverage Series Part 2: Who May Incur Losses Associated With Digital Assets and What Are The Potential Risks Of Loss And Liability Related To Digital Assets?

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

Among the most obvious users are exchanges where cryptocurrency is traded. It has been reported that the largest market for insurance in the cryptocurrency industry consists of exchanges that insure against cryptocurrency hacker thefts. Among the most important exchanges are Coinbase, Crypto.com and Gemini. Equally obvious are third-party custodians that store cryptocurrency and other forms of digital assets on behalf of consumers, such as BNY Mellon Crypto Currency or Fidelity Digital Assets. They provide custody of digital assets, including keys, and ensure accessibility.

However, the usage is much more extensive with the penetration of cryptocurrency and digital assets into the economy which has been growing almost parabolically since its inception. A 2020 survey published by HSB reports that “[a]At least a third of American small and medium businesses accept cryptocurrency as payment for goods and services. . . with newer companies up to twice as likely to redeem digital credits.[1] The survey adds that 59% of businesses that accept cryptocurrency have also purchased it for their own use.[2] Deloitte reported by the end of 2020, over 2,300 businesses in the United States were accepting bitcoin.[3]

Market penetration is also not limited to enterprises. While a 2015 Pew Research Center survey indicated that 1% of the population “collected, traded, or used” cryptocurrency, a survey conducted six years later, in September 2021, found that the percentage had risen to 16%.[4] Given the demographic slant of users with higher use among young adults (e.g. 31% of all adults between the ages of 18 and 29) reported in the survey, it can be expected that the use by adults continues to increase over time. This is especially true given the increasing levels of mainstream and web advertising featuring the likes of crypto.com’s Matt Damon and FTX’s Stephen Curry.

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

Like stock trading, investing in crypto-based assets risks loss due to fluctuating prices and stock market crashes. Losses due to price fluctuation will affect any person or business that buys, sells, accepts, or relies on cryptocurrency in any form. This also affects the value of NFTs which were previously sold at a significantly higher exchange rate.

However, the context of digital assets also presents very different forms of loss and liability. Both small and large scale losses frequently occur as a result of hack thefts. Along the same lines, vendors of cryptocurrency exchange or wallet security software are beginning to be held accountable for their inability to protect users (or react quickly) against hackers. Unsurprisingly, it has been reported that the largest market for insurance in the cryptocurrency industry consists of exchanges that insure against hackers. However, the type of hack can affect whether the hack victim has recourse against the exchange or access to insurance.

Particularly with respect to NFTs, much of the recent litigation (and liability) in this sector involves claims of intellectual property infringement.

These and other claims associated with digital assets may be covered by traditional and/or new insurance products, topics discussed in later parts of 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 of Emerging Issues in Litigation published by Fastcase Full Court Press, Volume 2, Issue 4 (Fall 2022)p.p. 255–276 (a full list of all references is provided in the published version of the review).


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