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Unique Risks Blockchain Companies Face

Sean X Cummings, CMO Embroker

The popularity of blockchain is increasing, and it's becoming more accepted in the mainstream business climate. This means that the framework which supports and services these assets is also growing. This growth, combined with crypto price volatility, means that blockchain companies will need to increasingly think about how they manage the industry's unique risks.

The risk profile of blockchain companies shares a fair amount of overlap with that of the more traditional technology-based businesses. However, the industry, by its nature, relies on what's still a relatively new and unique technology.

This makes insurance companies nervous to enter the blockchain space. Insurers rely on huge amounts of data and prior performance to create their offerings and evaluate businesses - data which still isn’t there in the blockchain/crypto space. Add in a still-developing legal picture, and uncertainty over new blockchain legislation being enacted - and it’s clear why risk management for crypto businesses is a complicated and quickly-evolving issue.

Let's break down the 4 most important unique factors that affect risk management for the blockchain industry.

Security Risks and Crime

Large crypto exchanges host vast quantities of digital currency. This fact makes them a juicy, tempting target for a slew of sophisticated cybercriminals. The costs thus far have been tremendous. Exchanges lost over $1 billion in 2018, a massive increase from $266 million lost in 2017. These losses aren't just a problem for the exchanges. They are decreasing the overall level of trust across the industry and represent a severe obstacle to the industry's entrance into the mainstream.

With such losses and a total lack of historical data, Insurers are nervous about offering cybersecurity policies to the blockchain industry. Blockchain businesses will have to look hard to find a reasonably priced policy that still offers robust enough protection. Sadly, many blockchain businesses are currently forced to overpay for policies that leave them with serious exposures.

Class Action Lawsuits

Class action lawsuits against ICOs are a real and present threat for any crypto business looking to launch their coins. Claims of misrepresentation and fraud are quickly increasing in both cost and how often they happen. This mainly stems from discrepancies in the information that the company presents in its White Papers during the product offerings and then the actual product offering at the time of the lawsuit. Since the market regulations are still evolving, it can be hard to remain compliant and avoid lawsuits - making risk management solutions even more important.

Shifting Legislation and Oversight

A lack of heavy government regulation has dramatically assisted the blockchain's rapid growth. However, such great success has attracted the attention of regulators. Questions about the level of oversight and internal control in the blockchain industry are being reevaluated.

The SEC is increasingly starting to regulate digital currency trading and launches. Icos and cryptocurrencies will only come under further scrutiny. While the ICO coins or tokens aren't necessarily classified as securities, they still have the potential to give their holders certain concessions in the issuer's businesses such as rights to profits, shares of assets, or exclusive services in addition to the value of the coins when listed on the exchanges.

A consensus on the precise classification of ICOs and other crypto assets, and their potential use for money-laundering and terrorism, still hasn't been achieved. All of this means that the legal landscape remains loose, and a quick decision on these issues appears to be unlikely.

Protecting A Crypto Business

The quickly changing, unique risk profile means that blockchain ventures need unique risk management solutions. Insurance carriers have been slowly expanding their offers to provide tailored solutions for crypto exposures.

However, this increase has been too slow to respond to the industry's quickly emerging needs appropriately, and the demand is still far higher than the supply. Many insurance providers are still hesitant to offer to the crypto industry due to a relatively uncertain legislative situation, the lack of compliance experts, and a lack of historical data. This hesitancy has meant that insurance costs remain high, and policy terms are often overly restrictive and don't offer sufficient protection.

24-03-2020 17:48:51  |   Technology
With these limitations in mind, finding the right insurance partner is crucial for blockchain companies. Since the insurance market is still limited and relatively underdeveloped, it's essential to work with an insurer that understands the underlying risks as won't ask for exorbitant amounts for the most basic coverages.

Naturally, when considering potential insurers, the cost shouldn't be the deciding factor. Still, insurers with a deeper understanding of the industry are more likely to offer reasonable pricing for complete coverage.

About the author

Marketing mastermind and agent of change, Sean X has been looking into the future where brands, technology, and media intersect — and manipulating the present to get there — for more than two decades. He led global marketing for Ask, oversaw digital strategy for consumer leader Amazon Advertising, established an acquisition engine for the financial arm of American Express, and helped Nike and numerous other brands succeed. Sean is currently CMO at Embroker, a digital insurance company reinventing how businesses ensure they can take the risks they need to grow.

Image: Cloud Codes

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