12 June 2019Analysis

First captive to manage cryptocurrency risk formed on Bermuda

The first captive to manage risk associated with crypto currencies has been formed on Bermuda. The vehicle has been formed by a large financial institution to take on the risk of digital assets that it stores on behalf of third parties being stolen.

The captive will take on the first party risk of digital assets being stolen from cold storage. Though considered a very secure method of storing digital assets, the company wanted some protection against hacking or cyber crime that might target these assets. The company will retain some of the risk with the rest being held by the captive, which will not buy any further coverage in the open market.

Michael Parrish, head of client services for Marsh Management Services Bermuda, Marsh, and also chair of the Bermuda Captive Conference taking place this week, said that although insurance is available in the open market for such a risk, the client in this case felt a captive was the better option.

“They believe the risk is pretty low and see this as a good way of managing that,” he said. “Also, this could be just the start. They have not used a captive before and could expand it to cover other types or risk over time.”

He noted that the Bermuda Monetary Authority (BMA) had been very helpful and approachable in relation to the formation despite the relatively esoteric nature of the risk. He noted that Bermuda has the potential to establish itself as a centre of expertise around digital assets and this deal ties in with that ambition for the domicile.

He also predicted that this would be the first of other deals that would also see captives manage digital risks. “History shows that where coverage is difficult to secure or place, captives can have an important role to play,” he said.

He also noted that, in line with this thinking, he anticipates that the first captive to cover risks associated with the production of cannabis will be formed soon, likely on behalf of a company based in Canada, where the drug is now legal. “Companies are struggling to buy insurance in the open market and a captive would be a natural solution,” he said.