Cryptocurrency went from dark-web danger to high-tech investment opportunity seemingly overnight, and, as more consumers seek to use digital currency, more businesses are stepping into the space.
The adoption of cryptocurrency among small- and medium-sized businesses (SMBs) may be larger than one might think. According to a recent survey by specialty insurer Hartford Steam Boiler (HSB), as much as one-third of SMBs in the U.S. currently accept cryptocurrency as payment, and even more have purchased crypto for their own use.
The findings surprised HSB's own Vice President Tim Zeilman, who told PYMNTS that he hadn't realized the extent of SMBs' involvement in the world of crypto.
"They're both reacting to what customers are asking them to do, but they're also getting into this because there are advantages from a business operational perspective in accepting cryptocurrencies," he said in a recent interview.
Indeed, it makes good business sense to address customers' payment demands by enabling them to pay the way they desire. Yet, as Zeilman warned, small businesses are exposing themselves to unfamiliar financial and security risks — and insurance products today won't necessarily provide the safety net that SMBs need.
— HartfordSteamBoiler (@HtfdSteamBoiler) January 21, 2020
The Risks Of Cryptocurrency
Risks associated with the use of cryptocurrency vary widely, said Zeilman. One of the largest threats is financial loss linked to theft or fraud, with the likelihood particularly high when small businesses decide to hold onto their crypto assets for longer periods of time — rather than simply use cryptocurrency as a vehicle to accept payment, then convert it into a local fiat currency.
"A lot of the risks in cryptocurrency come with holding it over a period of time — that's when fraud takes place," he said. "You hold a bunch of cryptocurrency in the proverbial bank and it disappears, or you're subject to fluctuations you see due to volatility."
Recent analysis from CipherTrace calculated $4.4 billion in losses due to cryptocurrency-related fraud in the third quarter of 2019 alone. In total, fraudsters stole $15.5 million from crypto exchanges, while other losses were linked to a massive Ponzi scheme and cryptocurrency mining malware attacks.
Zeilman also warned that, for some small businesses, stepping into the cryptocurrency market could make them a bigger target for cyberattackers and fraudsters.
"If you are an accepter of major cryptocurrency of some kind, that could raise flags and draw attention from certain criminal groups," he said. "Once they're interested in you, they may do other nefarious things. Cryptocurrency won't necessarily weaken small businesses' security posture, but a lot of high-volume cryptocurrency transactions might draw the attention of less desirable elements that may then poke around your business."
A Lack Of Protection
While more small businesses are voluntarily investing in and working with cryptocurrency, there are cases in which SMBs might be forced to use crypto. Among the most troubling examples of this is in the case of ransomware, in which cyberattackers require ransom to be paid in a digital currency.
With ransomware costs surging, and with more attacks targeting small businesses in particular, business insurance providers have begun to introduce products for protection against the financial losses of such cyberattacks.
"As an insurance company, and on the claims end, this is the primary point where we encounter cryptocurrency with respect to our clients," explained Zeilman. "We have seen over the last couple years a major upswing in ransomware events affecting our insurance claims, and the vast majority are demanding payment in some sort of cryptocurrency."
While some insurance providers, including HSB, cover losses linked to ransomware, and guide small businesses through the cryptocurrency experience by helping them negotiate with attackers, access the demanded cryptocurrency and pay the ransom, Zeilman noted that this is largely the extent to which business insurance providers can help mitigate SMBs' cryptocurrency risks.
In the case of ransomware, he explained, insurance providers aren't necessarily covering cryptocurrency risk, but see cryptocurrency as a necessary tool to resolve a cybersecurity incident. In cases like exchange breaches or theft, SMBs are often left to their own devices for protection.
"My impression of the insurance market is that this risk, at the moment, is largely not covered by insurance," he said. "A lot of insurers see cryptocurrency still as a very immature field, and one that is still in flux, with a lot of uncertainty and a lot of fraud."
A New Reality
Zeilman said he suspects that many small businesses are not fully aware of the risks to which they are exposed from stepping into the cryptocurrency market. To protect themselves, he noted, small businesses should work with trusted crypto payment processing firms and exchanges, and do their research about risk exposures. He also recommended that SMBs use crypto primarily to transact, then exchange funds back into fiat currency, rather than hold onto that cryptocurrency for longer periods of time.
As the cryptocurrency market matures and evolves, however, patterns and behaviors in the ways that cryptocurrency is used are likely to change. As more consumers demand to pay via crypto, and as more businesses view the technology as a potential strategic investment, both the business community and insurance providers will have to adjust to meet the needs of a new risk category.
"This appears to be the new reality, something that is gaining widespread acceptance, even among smaller businesses and consumers," said Zeilman. "It does seem to me there is a responsible way to use crypto as a small business, and to mitigate a lot of those risks."