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Lloyd's of London warns underwriters on cryptocurrency risks

Lloyd's of London has warned its managing agents to tread carefully when underwriting risks related to cryptocurrencies, amid growing demand for coverage.

In a market bulletin published July 6, the insurance marketplace said: "In view of their novel nature and the absence of clear regulatory frameworks and precedents for cryptocurrencies and other crypto assets, Lloyd's considers that managing agents should proceed with a level of caution that recognizes the risks associated with this class of asset."

Managing agencies effectively act as holding companies for Lloyd's syndicates, which underwrite the risks at Lloyd's.

As well as ensuring they have the required underwriting expertise, Lloyd's also said managing agents should have "particular regard" to the increased risk of financial crime associated with cryptocurrencies, such as their use in money laundering and attempts to circumvent international financial sanctions.

"At present, cryptocurrencies and other crypto assets remain in the early stages of development and acceptance," Lloyd's said. "In some cases the use of cryptocurrencies has also resulted in negative media publicity through their association with criminal activity (for example, in the theft of crypto coins or in their use to support the criminal activity)."

Some regulators have raised concerns about the sustainability of crypto assets and the legitimacy of so-called initial coin offerings — fundraisings for new cryptocurrency ventures.

According to Lloyd's, lines such as specie, bankers blanket bond, cyber, professional indemnity, directors' and officers' liability, or D&O, and casualty treaty are among the most exposed to financial crime risk. Specie covers valuable items, such as jewelry, in transit or storage, while bankers blanket bond, also known as crime insurance, covers banks against losses arising from crime including that committed by employees.

Lloyd's said that policies currently available that cover cryptocurrency-related risks include coverage for private key theft and other hacking and cyber-type risks. It added that coverage for D&O and fidelity-type risks for businesses such as cryptocurrency exchanges, as well as initial coin offering-related risks, are being explored. Fidelity insurance covers losses arising from employee dishonesty.

The warning comes as cryptocurrencies are becoming ever more mainstream. Switzerland's SIX Group AG, the owner and operator of SIX Swiss Exchange AG, on July 6 unveiled plans to build a trading, settlement and custody platform for digital assets.

Lloyd's said it was issuing the guidance to managing agents because, as cryptocurrencies gain acceptance, the insurance market is receiving "an increasing number of requests for either specific policies to provide related coverage or amendments to traditional lines in order to provide or clarify coverage."