Sompo International’s Anthony Tjong, Senior Vice President and Deputy Head of London Market Financial Institutions, weighs in on crypto liability risks…
Having weathered the 2022 ‘crypto winter’, businesses in the sector are maturing and becoming more sophisticated insurance buyers in the process. However, carriers are likely to remain wary of crypto liability risks until global regulatory frameworks are implemented, says Anthony Tjong, Senior Vice President and Deputy Head of London Market Financial Institutions at Sompo International Insurance.
In the second quarter of 2022, the cryptocurrency market descended into a ‘crypto winter’. Following the collapse of stablecoin values earlier in the year, the flawed business models of more than one crypto exchange were exposed, causing a spate of bankruptcies and an extended period of low pricing for crypto assets.
Despite the turmoil that followed the insolvencies of some hey players in the crypto space, the market appears to have once more weathered the storm. Appetite for investment in crypto assets remains robust, and certain crypto risks remain highly insurable.
The current focus of Sompo International’s Global Markets FI team is on crime insurance for crypto custodians and this market has remained fairly stable. Appetite for the coverage remains consistent, capacity and line sizes have not been reduced, and carriers have held firm on rates.
However, policies covering professional indemnity and D&O risks for crypto companies are more likely to have been triggered by the recent insolvencies of firms like FTX, Celsius and BlockFi, threatening the sustainability of these classes of business.
As things currently stand, crypto is still a relatively unregulated sector, lacking a consistent governance framework for companies to adhere to. From an underwriting perspective, this can make crypto exposures a game of roulette when assessing the insurability of crypto entities.
But with the emergence of draft regulatory frameworks across some key territories, the crypto space is now getting closer to the point of effective governance, making it possible in future to construct a viable underwriting strategy around liability exposures.
EU aiming for clarity
In Europe, governments are pushing ahead with plans to implement an EU-wide legislative framework, following the passing of the draft ‘Digital finance: Markets in Crypto-Assets’ (MiCA) law, which was informally agreed by the EU Council in June 2022, and was passed by the European Parliament this April, alongside related legislation for the tracing of crypto asset transfers.
MiCA is intended to cover crypto assets not regulated by existing financial services legislation and includes key provisions for the issuing and trading of crypto assets – covering the transparency, disclosure, authorisation and supervision of transactions, as well as regulating public offers of crypto assets. The text of the draft agreement now needs to be formally endorsed by the EU Council before it can enter into force.
In a press release on the passing of the framework, EU rapporteur for MiCA Stefan Berger, said the laws meant the sector could regain trust damaged by the FTX collapse, and would create a competitive advantage for the European crypto asset industry, giving it a “regulatory clarity that does not exist in countries like the US”.
UK playing catch-up
Although the UK is behind the EU in forging an equivalent framework, the UK government did commit to introducing a regulatory regime for crypto assets in April last year, while HM Treasury launched a consultation in February 2023, which closed at the end of April.