Bitcoin: it’s a new currency – or is it?
Our Professional and Financial Risks division is used to managing a diverse and complex range of risks for clients across a broad spectrum of professional sectors. However, some risks are slightly more unusual than others and require a more creative approach to designing the insurance programme.
For example, earlier this year we were approached with a proposal to cover Bitcoin codes, secured in a safe, against the risk of those codes being stolen and fraudulently used to create new Bitcoins. For the uninitiated, Bitcoins are a virtual currency created by inputting codes into an exchange which, when done successfully, transfers an electronic Bitcoin to the user. When the Bitcoin is spent, that user’s ownership rights to the Bitcoin will transfer to the recipient.
There are widespread concerns about the use of this currency. In 2012, an academic from the Carnegie Mellon CyLab and the Information Networking Institute estimated that up to 9% of all Bitcoins spent were for purchases of drugs at a single online market, named Silk Road (which has now been shut down). Even now, roughly half are spent at a single online gaming website. Bitcoins are potentially very attractive to the criminal fraternity because they do not move via the traditional financial markets and are very difficult to trace. Of course, this also makes them appealing to people who have become disenchanted with banks following the global financial crisis and see this as a way of taking their business out of bankers’ hands.
Our principal concern, in addition to what we believed was a significant moral hazard attached to this currency, was the problem of valuation. Bitcoin values fluctuate wildly. As at 6th December 2013, a single Bitcoin was worth US$ 1,020. This has climbed massively since its inception, although as recently as July 2013 the exchange rate was under US$100. Obviously, this works both ways and when, on 5th December, the People’s Bank of China forbade banks to accept Bitcoin transactions, their value fell 22% overnight.
So should any loss occur on a policy covering Bitcoins the value of the loss would be impossible to determine with any accuracy since it changes so regularly and so widely. That makes it hard for us to take a sensible view on the cost of our potential exposure.
Security, of course, is also a fundamental concern. In a cyber heist in the last week of November 2013, 96,000 Bitcoins, with a putative value of about US$100m went missing from the Sheep Marketplace, an exchange. That certainly would have been headline news for days if it had been in a physical bank but the cyber theft was barely reported.
Time will of course tell if Bitcoins are the next great scam or whether they are genuinely a new way for people to transact with each other without needing to use banks.
At this stage, we at Markel are not convinced and because of some major concerns as outlined above we chose to demur with regards to this prospect, however intriguing it might have seemed.
For more information, please contact Scott Bailey on: +44 (0)20 3102 6091