Help Your Clients Mitigate Cryptocurrency Exposures

Cryptocurrency has attracted investors from around the world. However, it has also attracted scammers looking to take advantage of a growing market. Recent scandals and cyber incidents have shown that many companies and individual investors have substantial cryptocurrency exposures. Brokers can help their clients by discussing cryptocurrency investments and offering coverage solutions for crypto exposures.

The State of the Cryptocurrency Market

Fortune Business Insights says the global cryptocurrency market was valued at $826.6 million in 2020 and is expected to reach $1,902.5 million by 2028. Rising digital investments in venture capital are a key driver of the 11.1% compound annual growth rate that is expected to occur between 2021 and 2028.

Multiple financial institutions have invested in cryptocurrency in recent years. In fact, CB Insights found that 55% of the top 100 banks (when ranked by assets under management) were involved in the blockchain or digital currency either directly or through their subsidiaries, as of August 2021.

According to Chainalysis, the Central, Northern, and Western Europe (CNWE) market is the second largest cryptocurrency economy in the world, as of 2023, surpassed only by the North American market. The CNWE market accounted for $1 trillion in on-chain value between July 2022 and June 2023, representing 17.6% of all global transaction volume.

Fraud in the Cryptocurrency Market

The FTC says cryptocurrency is attractive to scammers because there’s no centralized authority to flag suspicious transactions, it’s not possible to reverse transfers to recoup losses, and many people are unfamiliar with how cryptocurrency works – a fact that scammers can exploit. These factors have led cryptocurrency scams to surge – in 2021, reported losses were 60 times greater than in 2018.

What may be the largest case of cryptocurrency fraud has centered on FTX. In 2022, the cryptocurrency market suffered following the collapse of FTX. The BBC reports that Sam Bankman-Fried, the founder of FTX, faces prison time for fraud and money laundering after a jury found him guilty of lying to lenders and investors and stealing from FTX.

The UK has also experienced a massive surge in cryptocurrency fraud. According to RPC, data from Action Fraud shows that the value of cryptocurrency fraud in the UK increased by 41% between March 2022 and March 2023, reaching a record high of £306 million.

Hacks are another major concern. Investopedia says several high-profile thefts have targeted cryptocurrency exchanges and platforms, including a $625 million hack on the Ronin Network and a $586 million hack on the Binance exchange. In 2022, hackers stole an estimated $3.8 billion from cryptocurrency exchanges and platforms.

New Cryptocurrency Regulations

According to Investopedia, FTX was the third largest crypto exchange at the time of the collapse. Its downfall has led to distrust in the crypto market and prompted calls for a regulatory crackdown with greater government oversight.

In the UK, new regulations restrict cryptocurrency promotions. Within 24 hours of implementation, the Financial Conduct Authority issued 146 alerts of unauthorised promotions. Meanwhile, the European Parliament says the EU adopted a comprehensive regulatory framework to regulate cryptocurrency markets in June 2023.

Helping Clients Navigate the Volatile Cryptocurrency Market

Recent volatility and fraudulent activity show that investors face numerous risks when dealing with crypto assets.

Since cryptocurrency is a relatively new and still developing market, some brokers may not have incorporated crypto-related risk management strategies into their services yet. As a result, many clients may lack the protection they need to prevent and mitigate major losses. Brokers can help in the following ways:

• Educate clients about cryptocurrency-related risks. Both retail investors and businesses with cryptocurrency investments should be aware of the risks. One way to inform them is to provide information from reputable sources. For example, Action Fraud has tips for avoiding cryptocurrency fraud, such as checking the FCA Register to verify that a firm is authorized.
• Offer insurance for cryptocurrency-related losses. The nature of cryptocurrency means it may be impossible to recover funds once they are lost to a scammer. However, new cryptocurrency insurance products offer coverage for some losses. For individuals and businesses with significant crypto-related exposures, such coverage may be worth pursuing.

Costero offers innovative insurance products for digital assets and cryptocurrency-related exposures. Retail investors can rest easy with Coincover’s wallet protection product, whereas exchanges, custodians, banks, investment managers, and other companies with crypto exposures can benefit from our various protection solutions. Learn more.