To Bit or Not to Bit: Virtual Currencies, Real-World Risk


What do Ashton Kutcher, Bill Miller, Marc Andreessen, the Winklevoss twins, and Daniel Master all have in common? They are all supporters, investors or owners of virtual currency.

While bitcoin is the name we frequently hear, there are actually other virtual currencies – XRP, Ethereum, and Dogecoin and even the former Coinye West altcoin, to name a few. People seem to love or hate the five-year-old Bitcoin. (Al Gore is in the former group, Warren Buffet in the latter).

What’s so appealing about virtual currency? It has low transaction costs (versus, say, credit cards), it is borderless, and it is an almost instant transaction (unlike wire transfers or security transactions).

There are of course unappealing aspects of Bitcoin, but I won’t get into the pros and cons here. If you want more information on Bitcoins, there is an excellent article in American Banker Magazine, “Why Bitcoin Matters for Bankers.”

How Big are Virtual Currencies?

Regardless of where you fall on that love/hate spectrum, it’s clear the virtual currency is big:

  • There may be over 435 virtual currencies in the world
  • Estimates of merchants who accept Bitcoin range from 3,400 to 6,000.  Those merchants include Tesla,, Amazon, Target, and CVS to name a few
  • There are Bitcoin ATMs around the world
  • The Winklevosses are awaiting regulatory approval for their Bitcoin ETF (Exchange Traded Fund) listed on NASDAQ – symbol COIN
  • Daniel Master has launched the first regulated Bitcoin hedge fund – Global Advisors Bitcoin Investment Fund – GABI
  • Falcon Global Capital, LP is billed as “The World’s First Bitcoin Investment Fund with Insured Protection”
  • Xapo—who offers secure Bitcoin storage and wallet services—raised $40MM in investment capital, the largest for a Bitcoin company. Investors included well-known people/firms such as PayPal Inc. co-founder Max Levchin, venture capitalist Yuri Milner, Yahoo! Inc. co-founder Jerry Yang and Fortress Investment Group LLC. The company plans to introduce a debit card for use at retail stores.

The Fluid Bitcoin Environment

A few interesting things to note about the Bitcoin operating environment are:

It Lacks a Consistent Definition

It is described in a variety of ways including as an alternative currency, a commodity, and/or a money transfer system.

It is Not Backed by a Government or Regulated—Yet

Although leave it to New York State to be the first state that is proposing comprehensive regulations for Bitcoins, even though the SEC, The Fed and the CFTC have all talked about how to regulate Bitcoins. The CFPB is accepting complaints on virtual currency. The State of California signed a law legalizing bitcoins as currency recently. In doing so, CA might have inadvertently exposed crime insurers to bitcoins for CA insureds. Additionally, the UK Chancellor of the Exchequer has announced an investigation into the role of digital currencies in the UK financial sector, while China’s central bank recently declared that Bitcoins are not a currency.

As for government backing, Ecuador recently announced plans to issue a national digital currency, which it claims is the world’s first digital currency issued by a central bank. It is also banning bitcoin. In a country where it is estimated 40% of the population is “unbanked” the plan is to enable that nation’s poor to bank by cellphone using digital currency. This will be interesting!

It is Treated Differently by Key Stakeholders

Insurers treat it as securities, the IRS treats it as an asset, and the Treasury Department treats it as a traditional currency (and has extended Anti-Money Laundering Rules to this currency).

Implications for Risk Managers

So what’s a financial services risk manager to do about digital currency risk in this new, unregulated world? How can a risk manager mitigate and transfer this risk?


As of this writing, no US banks have opened accounts for bitcoin companies, so those risk managers are probably safe for now.

Investment Banks, Asset Managers, Venture Capitalists

As noted above the fund world is engaged in this sector, as are venture capitalists. The first challenge for those risk managers is to determine if in fact you have an exposure. The next challenge becomes how to mitigate it.

Great American is the first insurer to tackle this risk. In June 2014 they announced they are offering Bitcoin crime coverage, but only for mercantile and government entities covering employee dishonesty only. An industry first, but not really applicable to FIs.

A review of the FI crime coverage purchased by financial institutions shows that Bitcoins do not quite fit the definition of money or security; accordingly you should not assume it is covered. In fact, due to the lack of clarity around Bitcoins, you may want an endorsement to specifically cover virtual currency if you have an exposure. Willis has done this for clients.

In addition to crime coverage, there is a potential for business interruption loss in the event a hacker disrupts your system. Accordingly you may want to look to your property and cyber cover to determine if either affords your FI any protection, particularly with the overlap in business interruption coverage offered by property and cyber policies. Once the markets wake up to this risk, they will likely issue clarification or exclusionary language.

Service Providers

To date we know:

  • Elliptic Vault was one of the first Bitcoin service providers who stated they offered custodial services insured by Lloyds of London. Lloyds, however, quickly stated for the public record that the deal was not finalized. Since this apparent divorce, Elliptic Vault has placed coverage with an unidentified multinational underwriter. Falcon Global Capital LP, mentioned above, is insured by Elliptic.
  • Xapo, too, has secured insurance for its custodial services.

What about other service providers? It is difficult for this sector to get insurance, not unusual for a new industry, but further complicated by the enigmatic nature of Bitcoins. Xapo’s CEO Wences Casares spoke to this in an article where he noted:

Insurance companies do not understand [Bitcoin], and even fear it,” Xapo CEO Wences Casares told digital currency news service CoinDesk…. The California-based company’s policy is “much larger than $15m”, according to Xapo’s senior vice president of business development Ted Rogers, and part of the reserve is held in Bitcoin.

The challenge for Xapo was to persuade insurers that they had reduced the risk of loss by implementing strong security standards, said Casares, adding:

We could not have this insurance if we had not made the investment we have made in the deep cold storage, multi-signature [wallets] and physical vaults.

The Bitcoin world is still in its infancy. There are more questions than answers, but it is growing up at a fast pace. Financial institution risk managers should identify their exposure, talk to their brokers and insurers about amending their policy to affirmatively cover this risk and be prepared for when their firm takes a bite at Bitcoins!


About Zakia Phillips

Zakia Phillips is Executive Vice President of Willis Towers Watson’s Financial Institutions Group and North Ameri…
Categories: Financial Services | Tags: ,

One Response to To Bit or Not to Bit: Virtual Currencies, Real-World Risk

  1. Bigcoin says:

    Hello Zakia and congratulations for good written article. Indeed, it would be very interesting to see what will be the future of cryptocurrencies.

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