Cryptocurrency risks

15 March 2018

Cryptocurrency, blockchain and initial coin offerings (ICOs) are words that we are all now familiar with. We witnessed the steady rise in the value of bitcoin and we have also now seen its decline. It is perhaps this unpredictability, along with a rise in the use of ICOs to raise funds from the public, and the associated concerns of protecting the interests of consumers and investors, that has started to focus the minds of governments and regulators around the globe, including the UK.

Many countries have been struggling with cryptocurrencies in terms of what they are and what should be done about them:

  • Are they currencies or assets?
  • Are they legal tender?
  • Should they be regulated by financial regulators or central banks?
  • Should they be regulated nationally or internationally? 

Certainly these are all questions which these decentralised currencies have raised and countries have differently answered.

Last year the FCA made formal announcements around: (i) investment in bitcoin, likening its risks to that of gambling; and (ii) ICOs, referring to them as very high risk, speculative investments. However given the view of the FCA is that cryptocurrencies such as bitcoin are in fact "commodities" and therefore not regulated by the financial regulators in the UK, the FCA's suggestion seemed to be that it was up to Parliament to look into them.

On 22 February 2018, the UK Treasury Committee announced an inquiry into cryptocurrencies, and the technology that underlies them. The inquiry will look at the:

  • Role of cryptocurrencies in the UK
  • Risks that consumers, business and the government may face as a result of cryptocurrencies (including volatility, money laundering and cyber crime)
  • Impact that distributed ledger technology will have on financial institutions and infrastructure
  • The response of UK regulators (including the FCA and BOE) to cryptocurrencies and the need to balance regulation to protect consumers and businesses, with innovation.

Last week, on 2 March 2018, Mark Carney the Governor of the Bank of England (BOE), also announced that the BOE's Financial Policy Committee (FPC) is considering the risks which cryptocurrencies pose to the UK's financial stability. He would like them to meet the same level of regulation as the rest of the financial system. He is concerned that cryptocurrencies present issues around consumer and investor protection, market-integrity, money laundering, terrorism financing, tax evasion and the circumvention of capital controls and international sanctions.

Across the pond in the US, the Securities and Exchange Commission’s (SEC) Enforcement Division has issued numerous subpoenas to the companies and their advisors and lawyers behind ICOs. While the SEC has made no formal comment it is understood that they are looking to ensure that the ICOs are conducted legally.

Some say that bitcoin is a bubble, and there has been concern and criticism over the long term sustainability of cryptocurrencies. Warren Buffet has said “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending”. There is certainly more optimism around the potential uses of the technologies that underlie those currencies and the innovations they will bring across the financial services sector.

While governments and regulators are getting to grips with cryptocurrencies, ICOs and their risks, so too is the insurance market. Insurers are currently taking a cautious approach to these risks but they are assessing them and in some instances writing them. There is no formal guidance from Lloyd’s of London as yet, and the risks that insurers are writing are mostly where they are satisfied by the client’s anti-money laundering and know your customer controls.

More guidance from governments and regulators will help us all better understand those risks and in that regard the interest in the UK from the Treasury Committee and BOE is positive. The hope is however that the balance between regulation and innovation is achieved.

JLT have established a cross discipline working group to monitor and analyse these emerging and developing risks, and to drive insurer thinking on the management and transfer of these risks.

For further information please contact Carey Lynn, Senior Partner on +44 (0)207 558 3521 or email

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