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The rise of crypto

We have all avidly observed the recent Bitcoin surge in recent months. After a couple of years of relative quiet, Bitcoin (and other crypto currencies) have surged to new record highs and again captured the attention of the media and investors around the world.  We have seen Bitcoin rallies before (particularly in 2017), but this time it is different.  No longer is it primarily the investment domain of the new age digital currency traders, many of whom have limited prior investment experience.  This time, the Wall Street elites and other finance commentators who previously rubbished Bitcoin et al as a useless and speculative investment with warnings of a valuation bubble, are now helping to drive the demand for cryptocurrencies. Bitcoin is now referred to by some as a legitimate hedge, a defensive asset class not dissimilar to the traditional gold investment.

Now we are also seeing institutional money begin to enter the market, with the likes of Blackrock approving funds to start investing in cryptocurrency and companies like Tesla putting Bitcoin on their balance sheet, is it any wonder financial planners are receiving calls from clients eager to explore the asset class?

While most financial planners appear to remain cautious on providing any advice to their clients around Bitcoin and other cryptocurrencies, the question remains that if they are to recommend such products, are they covered under their professional indemnity (PI) insurance?

To date insurers of financial planning firms have been relatively silent on coverage for advice on cryptocurrency.  Often insurers will not act on addressing coverage until there is a trigger – like a claim or a specific request for coverage.  Ultimately, underwriting the risk in the crypto world is incredibly difficult and in talking to insurers it’s clear that they are extremely cautious.  The unregulated nature and high-price volatility make it too risky for some insurers to offer coverage for advice around crypto, including any financial products like managed funds tied to crypto.  Having spoken to the major insurers of AFS licensees, the feedback has been there is no intention to cover advice from financial planners around cryptocurrency and it is likely specific exclusions may soon start to appear on Financial Planning PI policies.  With regards to financial products, we may see insurers develop an appetite to insure investment managers who diversify their portfolios by adding a small allocation of their assets to cryptocurrency.

Where to from here?

Any financial planner considering recommending investments into cryptocurrency should think about the uninsured risk they are potentially exposing to their business.

Almost all financial planning PI polices exclude cover advice for investment products not found on their Approved Product List (APL).   Therefore, prior to advising on any form of cryptocurrency investments, it’s important to disclose this to your PI insurer.  However at this stage, insurers have made clear they are not comfortable with this advice and would be looking to exclude any cover regardless.