As the use of cryptocurrencies like Bitcoin increases, so will the demand for insurance to protect against the risks associated with them. A number of global Bitcoin storage providers offer their customers insurance for storage vault failure. At least one US insurance group offers Bitcoin holdings insurance as an endorsement to existing crime policies.
Given the unregulated status of cryptocurrencies in South Africa, insurers entering this market will need to carefully assess the risks they are able to insure and on what terms.
Are Bitcoins insurable in South Africa?
The threshold test is whether there is an insurable interest in the cryptocurrency. Insurable interest is a wide concept in South Africa and it seems that Bitcoins and liabilities associated with them ought to be insurable.
The scope of cover
There are two broad ways to design a Bitcoin policy:
- Property insurance covering the loss of Bitcoins from personal wallets.
- Liability insurance relating to the loss of Bitcoins arising from, for example, financial institutions processing Bitcoin transactions or trading in Bitcoins on behalf of customers.
In either case, the policy scope and exclusions must be considered in light of the virtual nature of Bitcoins, the circumstances in which they may be lost or stolen and the way in which transactions are concluded.
Insurers are likely to keep the cover within carefully defined limits due to underwriting risks such as accidental disclosure of private encryption keys, a significant potential for fraudulent claims and the difficulty of predicting the collapse of technically sophisticated systems.
Potential policy features
- Bitcoin property insurance policies structured as part of overall secure storage offerings in response to the risk of hacker-related theft.
- Warranties and exclusions relating to a breach of confidentiality of private encryption keys.
- Limits of indemnity expressed in real currency denominations to mitigate the exchange rate volatility risk.
The volatility of cryptocurrencies (Bitcoin in particular) also presents a practical difficulty for regulators and insurers in relation to the required levels of capital to be maintained. The Financial Services Board has not yet issued any guidance on this.
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