Insurance coverage

Cryptocurrency Hacking and Insurance Coverage Concerns

What you need to know in a minute or less

Blockchain and distributed ledger technology hold great promise for advancements in logistics and supply chain management, healthcare, finance, and many other aspects of work and personal life. Smart contracts are revolutionizing digital asset trading, decentralized finance, corporate governance, and even the practice of law.

Cryptocurrency markets, although currently facing startling devaluations, bankruptcies, and regulation by law enforcement, are still attracting substantial interest from traditional financial institutions and retail investors. However, litigants should be aware of recurring malfeasance and resulting legal claims involving cryptocurrency and other digital assets.

Hacking and theft of digital assets

Hackers and other malicious actors have long focused on cryptocurrency markets and continue to steal digital assets from trading platforms and market participants who use them. However, telecommunications service providers, commercial retailers, banking institutions and other entities have not been spared. The plaintiffs have filed several lawsuits claiming that the defendants acted negligently by failing to prevent unauthorized transactions and theft of digital assets.1

To avoid or mitigate litigation risks, companies should strengthen their cybersecurity measures by engaging experts to assess their cyber deterrence capabilities and implement best practices. Companies should ensure that all applicable contractual agreements contain appropriate safeguards, limitations, and exclusions to properly address the risk of a claim for theft of digital assets or personal information.

Insurance cover

Those who experience cryptocurrency theft can try to recover from their insurance company.2 Many insurance policies do not specifically address digital assets. Where there is ambiguity, there is opportunity, but also risk.

Policyholders should review their existing policies accordingly, assess whether they should seek coverage for cryptocurrency-related losses, and possibly obtain suitable new or additional coverage to protect their interests.

Arbitration Clauses

Many digital asset exchanges require users to agree upon account opening to arbitrate any claims for loss, rather than going to court for cyber breaches and loss of asset value resulting. When evaluating how to pursue (or defend against) such a claim, litigants should first assess the existence or nature of any arbitration clauses in their account opening documents or terms of service.3

Although blockchain technology and digital assets raise new and complex issues for litigants, the rules of the game have not completely changed. Litigants should monitor developments in this space to improve their legal practice and meet their professional responsibilities for technological competence.


FOOTNOTES

1 See, for example, IRA Financial Trust v. Gemini Trust Co.1:22-cv-04672 (SDNY) (plaintiff alleged that defendant failed to provide adequate safeguards to protect its customers’ digital assets that were stored on defendant’s trading exchange, which were later hacked and caused over $36 million in damage.)

2 See, for example, Nationwide Mutual Insurance Company v. Choi et al.4:22-cv-01231 (SD Tex.) (insurance company requests statement that it has no obligation under homeowners policy or umbrella policy to defend or indemnify defendants in a lawsuit for theft of cryptocurrency or any related claims); Virtu Financial Inc. v. Axis Insurance Company1:20-cv-06283 (SDNY) (The trading company sued its insurance company in connection with a cyber breach and theft, and the parties have settled the case.)

3 See, for example, Clark et al. against Payward Inc. d/b/a Kraken8:17-cv-01623 (MD Fla.) (plaintiffs filed suit alleging negligence and breach of contract by Kraken following its handling of a cyber-attack and the resulting “flash crash”, and Kraken decided to compel arbitration.)