The 325-year-old Company that’s Learning about Bitcoin

The venerable insurance market, Lloyd’s of London, got its start in a coffee shop. The Lloyd’s Coffee House opened up around 1688 and quickly became the place for London-docked sailors, shipowners, and merchants to caffeinate and hear the news of the day.  It was also where some financially savvy mariners began to discuss the problem of seaborne risk, and the possible policies of shipping insurance. These discussions fused technology, industry, and finance; they demanded an excellent working knowledge of all things underwriter and underwater; the spirit of that conversation continues to this day.

Last Thursday I spoke to a packed room of underwriters from Lloyd’s’ marketplace. The topic?Bitcoin and risk. The conversation avoided talk of block-and-tackle or tradewinds, focusing instead on blockchains and elliptic curves. The occasion also marked the release of a paper that Jerry and I coauthored on operational risks facing bitcoin businesses and how those risks can be mitigated and priced for insurance purposes.

I can imagine those older conversations in the Lloyd’s Coffee House, ripe with the same healthy skepticism I encountered last thursday: Captains talking of storm-free straights and measuring longitude using super precise nautical chronometers . . . while their insurers decide whether such knowledge and technique warranted a reduction in premiums. For us, the talk was of cold storage, multi-sig addresses, and hybrid wallets. Questions from underwriters were on-point and key: Is the risk inherent in holding a key offline within a physical vault actually identical to holding a bar of gold in a similar vault. Can or would miners ever block transactions involving stolen funds and would this be desirable given the damage it would do to the currency’s fungibility.  

Irrespective of the particular answers to the many questions we encountered, there is a larger and hopeful message to the conversation: the world’s leading insurers are becoming knowledgeable about cryptocurrency and that knowledge will enable them to price the risk of using bitcoin and offer affordable insurance to entrepreneurs. Ultimately, the availability and widespread use of insurance will offer additional protections for the consumers who choose to store their bitcoin with a business. That added protection is also exactly what will help regulators comfortably choose lighter-touch legal regimes for these businesses. The end goal, as always, is ensuring that cryptocurrency innovation remains unhindered by unnecessary costs, and by educating these insurers we’ve taken an important step toward that goal.

For more specifics, I invite you to read our report. We cover the basics of cryptocurrency, local attacks on businesses storing bitcoins, and global attacks on the network itself. Read on.