Covering Bitcoin risk is ‘something you might want to consider,’ expert tells insurers

Insurance carriers should consider covering the security risks of Bitcoin exchanges’ electronic storage, while a buildup of gases such as acetylene in electrical transformers could indicate faults that could lead to equipment failure, speakers said at the recent Annual Engineering Insurance Conference (AEIC).

Ethan Wilding, project member for the Ethereum computer programming language and Resident Philosopher at Bitcoin Decentral, gave a presentation on Bitcoin Wednesday at AEIC in Toronto.

Wilding noted it is “not clear” now whether Bitcoin is money for the purpose of regulation.

“You can use it for currency because it’s kind of like a stock,” he said. “Ultimately, it’s its own new asset class and we’re trying to figure out how to conceptualize it, at least in terms of the regulations.”

Consumers can buy products by purchasing Bitcoins, which fluctuate in value. Consumers put Bitcoins in their “wallets” and then transfer them over a computer network to sellers’ wallets. Dell Computer Corp., for example, is one firm that accepts Bitcoin as payment. Bitcoin Decentral’s services in downtown Toronto, include a Bitcoin machine that lets customers insert cash and add value to their Bitcoin wallets.

There are several ways of buying Bitcoin – including exchanges, where buyers can deposit money, use it to buy Bitcoin and then transfer the Bitcoin to their wallets, Wilding noted. Those exchanges store some Bitcoin online but typically store most of their Bitcoin offline, on computers that are not connected to the Internet. Wilding noted some insurance carriers are covering the risk of the security of this “cold” storage.

“If you are working in the insurance industry, this is something you might want to consider,” he said. “Get some actuarial scientists on it and see if it’s not something you can get involved in and make a big name for yourself as a premier Bitcoin underwriting company.”

He noted the system used to electronically transfer Bitcoin around the world is a peer-to-peer network of computers.

“At the moment it hasn’t been hacked,” Wilding said of the peer-to-peer network. “If you do lose your Bitcoin it’s probably from your own personal lack of security skills. Maybe you left your laptop open with your Bitcoin (wallet) open. Maybe you had your password written on a piece of paper beside your computer.”

Unlike credit card payments, there is no way to reverse the charges of Bitcoin, Wilding noted.

AEIC is part of the Canadian Boiler & Machinery Underwriters Association (CB&MUA). 

Also presenting was Paul Boman, director of the transformer oil and gas analysis (TOGA) program at Hartford Steam Boiler (HSB) Inspection and Insurance Company.

Boman described how TOGA analyzes results of tests of fluid from electrical transformers.

Boman noted that when a transformer has some sort of defect (which could be caused by a lightning strike, for example), there could be a buildup of gases such as acetylene, methane, ethane, ethylene or hydrogen.

“All of these things are produced in a transformer when you have a fault of some sort,” he said, noting that a testing program could be used to warn the owner of a possible failure in the future.

According to a survey from the Institute of Electrical and Electronics Engineers (IEEE), “typically” anywhere from 0.5% to 3% of transformers fail, Boman warned.

“That can vary dramatically between operating companies because operating companies have very different maintenance practices,” he said, noting a big concern is when arcing occurs.

“Typically transformers do not have any kind of arcing,” Boman said. “All transformers gas at some point or another. Not all gassing is bad. Some of that is just innocuous stuff that is going to happen regardless of what you do. If you open up the transformer and look at it, you would not find any gassing source in there. A lot of my job is to try and tell people of the gassing that looks bad, that’s going to some type of failure mode or an active gassing source that’s causing problems.”

HSB’s TOGA program tests transformers without requiring anyone to open them up, Boman suggested.

“We are actually trying to look at the health of the transformer the same way your doctor looks at your blood to look at your health,” he said, adding it is difficult to look inside a transformer.

“It’s a big grey box. There’s no window.”