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Insurers Cautioned on “Silent Crypto” Exposure

Wilson Elser Moskowitz Edelman & Dicker | Anjali Das  | Jan 23, 2023

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The recent implosion of crypto firm FTX and its affiliates provides a case study for potential crypto exposure under traditional insurance policies in this series of four articles

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  • OCC Softens Stance on Banks' Cryptocurrency Activities: In the past few years, the U.S. Office of the Comptroller of the Currency (OCC) has issued a series of interpretative letters and guidance regarding the agency's loosening stance on banks engaged in cryptocurrency activities.
    • First, OCC confirmed that banks may provide cryptocurrency custody services to customers by holding the "unique cryptographic keys associated with cryptocurrency.
    • Second, OCC has indicated that banks also may hold reserves to support "stablecoin" transactions.
    • Third, OCC has authorized banks to participate in cryptocurrency transactions based on blockchain or DLT, including independent node verification networks (INVNs).
      • With advances in technology and the global financial markets, there is "increasing demand in the market for faster and more efficient payments through the use of decentralized technologies, such as INVNs, which validate and record financial transactions, including stablecoin transactions."6 As such, the OCC has concluded that a "bank may validate, store and record payments transactions by serving as a node [or participant] on an INVN.
  • OCC's softer stance on cryptocurrency activities by banks has opened the door for traditional financial institutions to participate in a limited capacity. In October 2022, the nation's oldest bank, BNY Mellon, announced the launch of its Digital Asset Custody platform to hold and transfer Bitcoin and Ether (ETH) for select clients.

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  • Don't Count on FDIC Insurance for Crypto Assets:
    • The Federal Deposit Insurance Corporation (FDIC) has made it abundantly clear that FDIC insurance does not apply to financial products such as "crypto assets" or other types of securities or commodities. Moreover, FDIC insurance "does not protect against the default, insolvency, or bankruptcy of any non-bank entity, including crypto custodians, exchanges, brokers, wallet providers, and neobanks."
  • Digital Asset Vault & Wallet Insurance:  In growing recognition of the need for insurance as a risk management tool for cryptocurrency and digital asset custodial services, insurance companies are slowly wading into the market with new and innovative products.

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