Cryptocurrency: insurance issues in the evolving compliance and regulatory environment
Survey data from the Senate Select Committee on Australia as a Technology and Financial Centre shows that 17 per cent of Australians currently own cryptocurrency, with a further 13 per cent planning to buy cryptocurrency in the next 12 months, making Australia one of the world’s most significant adopters of cryptocurrencies on a per capita basis.
The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) does not regulate cryptocurrency or digital assets other than requiring digital currency exchange service providers to register with AUSTRAC. This means that AUSTRAC’s power to monitor financial transactions and identify money laundering and fraud regarding crypto assets is limited.
ASIC’s regulations extend as far as products that fall within the definition of ‘financial products’ as defined in Chapter 7 of the Corporations Act 2001.
The global digital asset market has seen significant growth in recent years, with exponential increases predicted over the next decade. According to a report from Verified Market Research, the value of the global digital asset market is expected to increase by a compound annual growth rate (CAGR) of 17.67%, from USD 3.79 Billion in 2020 to USD 13.94 Billion by 2028. The surge in digital asset popularity amongst investors, and the global trend towards its regulation has encouraged the Australian Senate to release its own recommendations in regard to the development of a regulatory and licensing framework for providers of digital assets, and the implementation of strict guidelines for those who acquire them.
This is aimed primarily at facilitating the continued growth of digital assets in Australia through a legal process which mitigates the risk of harm to consumers and markets if they’re not handled appropriately; as ASIC explained in a recent report, its aim is to “help market operators and product issuers to meet their respective legislative obligations for the admission, supervision, establishment and operation of these products”. Furthermore, a classification ‘token’ system would be constructed, as a way to differentiate between the various types of digital assets – this may lead to certain tokens being classified as financial products and become subsequently bound by the rules of the Australian financial services licence. As these developments continue to unfold, digital assets will likely gain more acceptance and credibility as a viable, responsible investment alternative to traditional avenues.
We expect the increased regulatory focus on digital assets to continue into 2022 however precisely how regulation is implemented remains to be seen. If the Australian Government progresses its intentions as laid out in the Senate report, we expect Treasury will be empowered with control over a new category of financial market licensing regime which will create protections for holders and investors in digital assets and rules surrounding custody.
Notwithstanding this, the Government has not gone as far as recommending that digital assets or cryptocurrency be deemed ‘financial products’ that would fall within the legislative definition. As such the consumer protections available would not extend to those receiving advice about those products thus removing them from the list of products finance professionals can recommend to retail clients.
The increased rate of adoption of digital assets has invariably led to enhanced focus on associated insurance needs. Absent formal regulation and a definition of the terms of reference as regards the owning, trading and sale of digital assets, there is very limited insurer appetite to cover losses in connection with digital assets. As regards financial services professionals in which Bellrock advises:
- Financial advisers: In most instances, policies have a nexus as between covered financial services in connection with the licensees’ “approved product list”. On that basis, professional indemnity cover for advice in connection with digital assets would be excluded (as it cannot be considered a financial product per the above).
- Investment managers: Most insurers exclude coverage, by express endorsement, for any claim or loss in connection with cryptocurrency. These exclusions may be applied to combined or stand-alone investment managers’ policies (professional indemnity, crime and directors’ and officers’ liability) and cyber insurance policies.
There has been some insurer interest in offering limited coverage for financial services professionals. It remains to be seen how insurance markets deal with the emerging demand for products that afford protections to those businesses dealing with digital assets. In time the Government may recommend or mandate that financial institutions maintain insurance coverage responding to financial losses suffered by their clients through investments in or the holding of digital assets.
We expect 2022 will see new and innovative entrants in the insurance market with offerings in the digital asset space which may result in the traditional insurance markets being enticed to advance their progress in this area.
For further information or advice on insurance related to digital assets please contact us via the form below.