While it can be easy to get caught up in the excitement and potentially lucrative nature of cryptocurrencies, it’s important to understand how they work as well as their positives, negatives and risks.
President Biden’s recent executive order was created to ensure the responsible development of digital assets. Specifically, the order will require the U.S. Treasury Department, the U.S. Commerce Department and other key agencies to study and report the role cryptocurrency will have on the U.S. economy. The administration’s concerns include a lack of market oversight and threat of cybercrime. The order also requests the Securities and Exchange Commission (SEC) and the Consumer Financial Protection Bureau to examine additional risks.
How Do Cryptocurrencies Work?
Cryptocurrency is digital money that operates independently of a bank and can be used similar to cash. Cryptocurrencies store value, have specific exchange rates and are limited in supply. The digital nature of these new currencies adds some appealing benefits that have led to their increasing popularity.
Most cryptocurrencies are decentralized and work without administrators. Transfers rely on encryption technology and verification. No central authority manages the creation and use of cryptocurrency. Instead, most cryptocurrencies implement a network that allows users to make transactions directly. These networks use a shared system of private keys and public ledgers to authenticate new transactions and create an encrypted log of past transactions.
Cryptocurrency BenefitsProcessing Fees
Cryptocurrencies often have no processing fees as transactions are facilitated through the cryptocurrency’s public network known as a blockchain. Transactions are recorded on the blockchain chronologically. Users can create, verify and enforce transactions without an intermediary or central authority.Transaction Speed
While credit and debit card payments can take multiple days to process and clear, cryptocurrency transactions happen in real time. Once your transaction is confirmed, it is fully settled and the funds are available. Additionally, cryptocurrency transactions are final and provide merchants with protection from fraudulent chargebacks or charge reversals.Payment Options
Providing consumers with multiple payment options can influence additional sales and revenue. Further, cryptocurrency has the potential to attract a wider customer base.International Buyers
Cryptocurrencies have no international border and can enable your company to expand to international buyers. Foreign customers can purchase without the restrictions of hefty fees, regulations, currency exchanges or sanctions.
Cryptocurrency RisksPrice Volatility
The value of Bitcoins and other cryptocurrencies can change drastically over a small period of time. The price of Bitcoin incurred an impressive performance last year, surging over $60,000 before falling to $30,000 in early 2022. Similarly to trading stocks and bonds, investing in cryptocurrencies can be a risky investment.Anonymity
The details of cryptocurrency users and transactions are often held in a public ledger; names and locations are encrypted. This can be an issue when complying with customer identification or fraud protection regulations. Many governments have begun to take a greater interest in cryptocurrencies. Recently, China ordered state-owned banks to cut off all transactions related to Bitcoin, and South Korea confiscated $47 million of cryptocurrency in regards to tax evasions.Cyber Security
Existing digitally, proof of ownership is often limited to the private keys used to authenticate transactions. This makes cryptocurrencies a prime target for hackers and dangerous for your business. A recent hacking attempt on Axie Infinity’s Ronin Network was able to secure $625 million worth of ether and stablecoin USDC. Additionally, cryptocurrencies are favored by many cyberattackers and are often the requested form of payment from ransomware groups. The 2021 hackers of Colonial Pipeline demanded $5 million in cryptocurrency for their ransom.
The U.S. government continues to track the cryptocurrency market and its association with cyber criminals. Recently, the U.S. Department of Justice seized $1 million from the Silk Road marketplace, a widely known digital black market. In addition, the Federal Bureau of Investigation (FBI) has communicated their request to all companies dealing with cryptocurrency to report abuses or face accountability. Learning how to install protection for this new form of currency is essential.
Protection for Your Business
- Diligently research before activating your cyber wallet. Review any application you’re contemplating for cryptocurrency transactions.
- Limit your cryptocurrency transactions to only services that provide protective security features. Limit your use to applications that apply multifactor authentication (MFA) for transactions.
- Consider not limiting your business to just one wallet. Instead, use multiple wallets for storage.
- Partner with your insurance broker to evaluate the new risks cryptocurrency could open up for your business.
We’re Here to Help
Cryptocurrency is not right for every business. Before accepting this currency, you should conduct adequate research and understand its rewards and risks for your company. If you have further questions about cryptocurrency and your insurance coverage, connect with a member of our team.