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Proceed with caution: Digital assets bring both new and established risks

Digital asset, including cryptocurrency, and their underlying blockchain technology may offer individuals and companies the potential to avoid using traditional banks, trade around the clock, and minimise the effects of inflation.
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By Jacqueline Quintal , 

Managing Director & Digital Asset Leader

05/02/2023 · 3 minute read

Digital assets and their underlying blockchain technology may offer individuals and companies the potential to avoid using traditional banks, trade around the clock, and minimise the effects of inflation. However, they are not without risks, as we explore in this breakout of our 2023 Global Technology Risk Study.

Digital assets continue to generate significant market interest, with one in five Americans having invested in, traded, or used cryptocurrencies, and NFT ownership doubling over the past year. Cryptocurrency is seen as having many benefits over fiat money, such as increased transaction speed, security, privacy, transparency, and diversification. Retailers are responding to perceived customer interest; one report shows that 46% of merchants and 85% of big retailers in the US currently accept cryptocurrency payments.

Additionally, digital assets and their underlying blockchain technology may offer individuals and companies the potential to avoid using traditional banks, trade around the clock, and minimise the effects of inflation. However, they are not without risks.

Digital asset values are extremely volatile, making them high-risk investments. A market valued around $3 trillion in November 2021 dropped to under $900 billion at the end of 2022. They are also prone to fraud; between January 1, 2021 and March 31, 2022, over 46,000 people reported losing over $1 billion in crypto to scams — more than any other payment method. Although cryptocurrency blockchains are thought to be highly secure, crypto repositories, such as exchanges and wallets, have been hacked. The technology developers building or supporting these platforms may face reputational or public trust risks in the event of a security failure or hacking.

Although the risks ranked highest on this year’s survey (data security and privacy, business interruption — digital, technology errors and omissions, reputational risk, and IT resiliency) are concerning, organisations operating in this space should especially consider their counterparty risks. Most of these companies are not building their own digital asset infrastructure, opening them to counterparty risks.

Organisations will also need to think about their regulatory risks. Companies should consider how potential regulations may affect them and change their objectives.

Regulatory clarity is likely to be helpful from a corporate governance perspective; however, as regulations and categorisations of digital assets evolve, more complex challenges may arise. Currently, courts and regulators struggle with how to define digital assets, as currencies, commodities, securities, or something else entirely. How these assets are classified ultimately determines which laws and bodies have purview over their regulation. As situations evolve, organisations using digital assets in house will need to review whether they are able to handle any added regulatory responsibilities, or if they need to partner with a third party to continue business in this space.

Although digital assets have many risks, both established and emerging, thorough risk analysis and proactively discussing strategic plans with underwriters can help organisations operating in this space secure the necessary insurance protections.

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