As I have noted in a number of recent posts, the question of providing appropriate insurance solutions for cryptocurrency companies – particularly for companies about the complete an initial coin offering (ICO) – continues to be a significant challenge. In the following guest post, Liam Fitzpatrick, Head of Public Offerings Focus Group for Marsh in London, takes a look at the characteristics of an ICO company that could make the company a more acceptable risk to prospective insurers. A version of this article previously appeared on Marsh’s Risk in Context blog. I would like to thank Liam for his willingness to allow me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Liam’s article.
The insurance market – as with traditional industries and the general public – is still getting to grips with blockchain technology, the sustainability of cryptocurrencies, and the legitimacy of initial coin offerings (ICOs).
An ICO is a means of fundraising for businesses or projects; it’s a way of raising capital in the form of digital currency in exchange for the issuance of new cryptocurrencies or crypto-tokens. Up until now, not much thought has been given to the insurance arrangements that can and should be put in place for those involved in ICO. Regulators across the globe are taking different approaches, with some taking a wait-and-see approach, which has created a lot of uncertainty.
Understandably, the fraudulent ICOs get more headlines than the success stories, and it is this negative publicity that will be in the insurer’s psyche when it comes to reviewing a risk in this rather novel area.
It is therefore very difficult (albeit not impossible) in the current insurance market to obtain directors and officers (D&O) liability insurance, professional indemnity insurance, crime insurance and/or cyber insurance for businesses that are at the forefront of this huge technological change.
That being said, recent activity by Lloyd’s demonstrates that ICO insurance could be a lot closer than many might think. Lloyd’s has been very proactive and has issued guidance in the form of a Market Bulletin on the topic setting out its expectations of insurers. This could prove a huge step towards the insurability of an ICO, or at least the insurability of a company behind an ICO.
What could an insurable ICO look like?
Although we are not yet at the point of an ICO being insured in the same way as an initial public offering, where a standalone public offerings of securities insurance (POSI) can be put in place, an insurer could be willing to provide cover for the individual directors and officers of a company that is considering an ICO where:
- The company is institutionally/VC backed and has already undergone a fiat fundraising, the company is already an established corporate with a good track record.
- The company has an experienced board or management team in place.
- The insurer has been able to fully evaluate all of the relevant exposures, including some of the aforementioned systemic exposures.
- The company can justify that the project underpinning the ICO cannot be achieved or the issue solved without blockchain technology.
- The company can provide the following to the insurer:
- a well thought through white paper,
- regulatory authorisations and permissions, including details of the systems put in place to ensure compliance with the securities laws of relevant jurisdictions,
- policies and procedures, especially around know-your-client checks, anti-money laundering, source of funds checks,
- evidence of advice sought from professional advisers, including legal opinions,
- audit reports,
- banking agreements,
- outsourced service arrangements.
In short, when ICOs start to look like IPOs, the insurance market as a whole is likely to be more comfortable; as we head towards that paradigm, companies should still consider their insurance requirements as it will not be long before certain insurers have the expertise and appetite to cover these risks.