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Cryptocurrency In Small Bytes - Insuring the Blockchain: Risks of Blockchain-Based Business

March 28, 2018

Businesses that deploy or rely upon blockchain may face unique risks. And just as businesses are considering the risks presented by blockchain operations, insurers similarly are sizing up the exposures.

A key question is whether there is some intrinsic difference in the risks posed by doing business through a decentralized blockchain system as opposed to a more traditional, centralized business model. While advocates of the technology contend that a blockchain model is more secure and reliable, there is no question that a blockchain is not infallible. Can the lack of control over each node of the blockchain enhance risk in unanticipated ways? Are limitations on how scalable blockchain can be, since every participating node in the network must process every transaction, fully understood? What are the implications in terms of business interruption and liability faced by a blockchain participant if a blockchain operation is locked down or disrupted, even temporarily?

Among other risks, exposures related to data security and privacy issues are at the top of the list. There is a risk of data theft or hacking, which could expose confidential data, even if the validity of the blockchain operation overall isn’t compromised. There also are concerns stemming from the fact that confidential business and personal information is being shared, needs to be encrypted or otherwise secured, and is being housed in multiple locations on a permanent basis. Does the blockchain’s means of operation meet regulatory requirements for handling confidential personal information? For instance, is the way a blockchain functions consistent with regulatory expectations that personal data will be destroyed when it is no longer necessary for business purposes? How does this regulatory expectation of destruction of personal data no longer needed for business purposes apply, given the permanence of transactions in a blockchain?

Apart from the risks that may be posed by blockchain technology per se, there are specific concerns posed by bitcoin and other cryptocurrencies. For instance, we are just beginning to get a glimpse of answers to questions such as whether cryptocurrencies are “money” or “funds,” and whether digital token public offerings or initial coin offerings (ICOs) are unregistered securities, subject to regulations governing equity market offerings. There may be substantial responsibilities and exposures posed depending on how the legal system answers these questions.

For early adopters of blockchain in innovating business operations, there are obvious risks. As use of blockchain technology grows, so does the need for insurance designed to address its risks.

Click here to read part 2.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Laura Foggan
Partner – Washington, D.C.
Phone: +1.202.624.2774