Philip Turner, Head of Specie
It seems that Bitcoin, or any one of the latest crypto currencies, are here to stay. Since Bitcoin’s 2009 launch, its origin as a global currency with no geographical barriers and no central bank interference has been superseded by its more recent role as the world’s most exciting and accessible asset class.
Although some of its reputation has been damaged by its association as the currency of choice for international gangsters, organised crime and as the legal tender of the dark web, it has seen an extraordinary 5000% increase in value over the past 5 years.
However, the transformation into a valuable assets class moves bitcoin from its footloose beginnings to a commodity more akin to the traditional work of fine art, gold, jewellery or wine. And when an item has value it inevitably needs security.
We often hear that the really great thing about bitcoin and its sister technology blockchain is that fraud and theft are rendered impossible. Of course, any claim of this nature immediately makes an insurance underwriter sceptical. While the two part public and private 50-digit bitcoin password might make it all but impossible for theft or hacking to take place, it cannot be protected from the human frailties of forgetfulness, stupidity or overzealous cleaning.
Take the cases of the former Wired editor Mark Frauenfelder, who having written his password on a piece of orange paper, returned from holiday to discover that the cleaner had thrown it away. Or Welsh IT worker James Howell who in an office clearance disposed of the hard drive that contained his bitcoin password. Whilst these men may spend many years scouring landfill sites, Philip Neumeister, who simply forgot his, is engaged in building a supercomputer to attempt to crack the password – a process that he estimates could take 300 years to work through all the possible combinations of letters, numbers and symbols.
Clearly, a solution is needed for this problem and the answer is relatively straight forward and has been used for millennia – placing the password in a secure vault. Going by the non-cyber sounding name of cold storage, this simply means an offline vault or safe held in a secure building and location and leveraging the same security measures that are used for gold or other precious valuables or commodities.
With this solution in place, there is now a role that insurers can play, unlike in the case of the forgetful or hapless password losers, where insurance is unable to help. The cover offered for passwords in cold storage is very similar to the indemnity available for the loss or damage to any high value item lost from a vault that result from the effect of fire, theft or flood. In this case, the market value of the lost bitcoin is reimbursed.
To date, this is still a niche product with only a limited number of policies sold and available capacity of under £300million. And for insurers, it is of course critically important before any offer of coverage, to ensure all appropriate ‘Know Your Customer’, sanctions and anti-money laundering checks are vigorously carried out. Yet while the technology that surrounds crypto currencies may be new, the frailties of human beings and the risk of accident and disaster are not. It is likely that this market will grow, as awareness of the importance of retaining the password does likewise.
Posted on 22nd June 2018.