Fraud Detection in the World of Bitcoin

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Jerry Trupin Exposures and Coverages. Bitcoin seems to be, as Winston Churchill said about Russia, a riddle wrapped in a mystery inside an enigma. Even the name Satoshi Nakamoto, the one claimed to have developed Bitcoin, seems to be an alias for some other person or persons.

Nevertheless, in many ways using Bitcoin is not that different from what bitcoin and fraudulent impersonation coverage may already be doing if you pay bills online and have payments electronically deposited. When you buy Bitcoins, the transaction is recorded on a digital ledger.

Bitcoin bitcoin and fraudulent impersonation coverage other types of virtual currency, also referred to as digital currency or crypto currency, are gaining users. Worldwide, the number of retailers accepting Bitcoin is estimated at more thanA recent article described Bitcoin this way: It has no independent value, and is not tied to any realworld currency.

Its strength and value come from the fact that people believe in it and use it. Anyone can download a Bitcoin wallet their computer and buy Bitcoins with traditional currency from a currency exchange… Transactions are secure, fast, and free, with no central authority controlling value or supply, and no middlemen taking a slice.

Cryptography is used to secure transactions, bitcoin and fraudulent impersonation coverage hacking is always a possibility. Federal Reserve Chairwoman Janet Yellen says the Fed has no authority to regulate it, which means, among other things, no Federal Deposit Insurance protection.

Since it works in many ways like paper money, checks, and bearer securities, there are obviously loss exposures to be insured. Insurers argue that standard money and security coverage would not apply to digital currency, but some courts have ruled that Bitcoin is money or a security. In one case, an online investment trust that invested in Bitcoin promised an incredible seven percent per week return. The trust replied that since Bitcoin is not actual money, the SEC bitcoin and fraudulent impersonation coverage not have jurisdiction.

If your client is looking for insurance for virtual currency, relying on debatable court precedents is not a good idea. Your client needs real insurance. InGreat American became the first US insurer to offer crime insurance for virtual currency. In its crime coverage revision, ISO has jumped in. ISO is closing the door to claims that a standard money and security policy covers virtual currency by adding an exclusion bitcoin and fraudulent impersonation coverage its crime forms:.

This insurance does not cover… Virtual Currency Loss involving virtual currency of any kind, by whatever name known, whether actual or bitcoin and fraudulent impersonation coverage including, but not limited to, digital currency, crypto currency or any other type of electronic currency. For those who want coverage, ISO has created a new optional endorsement: Bitcoin and fraudulent impersonation coverage endorsement contains a schedule listing the name of the currency, the name of the exchange, and the limit of coverage applying to virtual currency.

Coverage is provided by adding the following exception to the exclusion shown above: However, if a Virtual Currency Limit of Insurance is shown in the Schedule, we will pay up to that amount for loss of virtual bitcoin and fraudulent impersonation coverage shown in the Schedule.

The definition of money is amended to include the virtual currency shown in the schedule. Because virtual currency does not have a face value, the valuation clause for virtual currency is changed from face value to the value at the close of business on the day the loss was discovered, as published by the exchange shown in the schedule. The insurer has the option of replacing the currency or paying its value in US dollars at the time of the loss.

What should you do about this coverage? Chances are that few, if any, of your insureds are accepting virtual currency. However, some bitcoin and fraudulent impersonation coverage be. If you send regular correspondence to your clients and prospects, include a note about the availability of Bitcoin and other virtual currency coverage. Fraudulent impersonation coverage is a hot topic with crime underwriters. Many of the leading specialty crime insurers that use their own forms already have coverage available.

Fraudulent Impersonation coverage endorsement would provide coverage for the loss of money, securities, or other property due to an employee having, in good faith, complied with a transfer or delivery instruction that an impostor fraudulently transmitted. Eager to keep the supplier happy, the manager made the change and wired the money to the new bank account.

The next day, the real supplier called the manager in a panic to say it had been hacked and someone was posing as the supplier to customers. The supplier offered an apology … and then mentioned the matter of the unpaid bill. According to an alert issued last year by the U. In certain cases, the losses can be even greater…. Another is email phishing.

Cyber-security experts say that there are over million phishing emails sent every day. The standard ISO crime form contains an exclusion that would exclude coverage for most of these schemes:. It can close some of the gaps. At first glance that looks pretty good, but, as one of my favorite insurance mavens is fond of saying: RTFP—-Read the fine print. The endorsement defines customer and vendor as follows:. Customer is someone to whom you sell goods or provide services under a written contract.

A vendor is someone from whom you purchase goods or receive services under a written contract. Email has reduced the reliance on verbal contracts, but often the email trail is not complete enough to establish a true contract. Insurers using their own forms are often more liberal in their definitions.

Loss control is a key factor in reducing the exposure to fraudulent impersonation. Most applications ask for details about how the applicant verifies customer information before initiating financial transactions, as well as what types of vendor and supply controls and voice and electronic initiated transfer controls are used.

Some forms require verification of all transfer transactions as a condition of coverage. The ISO form has options to specify levels of verification. The insured may be required to verify all transfer instructions, verify just those in excess of a stated amount or not be required to verify at all.

This coverage is not expensive. One of the shortcomings of the current market for this coverage is the low maximum limit that most insurers are willing to provide. Next, check the coverage terms with several insurers.

Tell your clients about the availability of this coverage. Just about every firm is a potential victim. Current Issue Subscribe Advertise Contact. ISO is closing the door to claims that a standard money and security policy covers virtual bitcoin and fraudulent impersonation coverage by adding an exclusion to its crime forms: Fraudulent Impersonation Fraudulent impersonation coverage is a hot topic with crime underwriters.

A leading crime insurer illustrates the coverage this way: Transfer or Surrender of Property 1 Loss of or damage to property after bitcoin and fraudulent impersonation coverage has been transferred or surrendered to a person or place outside the premises or banking premises: Fraudulent Impersonation Employees…We will pay for loss resulting directly from your having, in good faith, transferred money, securities or other property in reliance upon a transfer instruction purportedly issued by: An employee, or any of your partners, members, managers, officers, directors or trustees, or you if you are a sole proprietorship if coverage is written under the Commercial Crime Coverage Form or Commercial Crime Policy… Customers and Vendors…We will pay for loss resulting directly from your having, in good faith, transferred money, securities or other property in reliance upon a transfer instruction purportedly issued by bitcoin and fraudulent impersonation coverage customer or vendor, but which transfer instruction proves to have been fraudulently issued by an imposter without the knowledge or consent of the customer or vendor.

The endorsement defines customer and vendor as follows: He is, in effect, an outsourced risk manager. Jerry has been an expert witness in numerous cases involving insurance policy coverage disputes and has taught many Bitcoin and fraudulent impersonation coverage and IIA courses. He can be reached at jtrupin aol.

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The criminal minds of today are no different. And the schemes are creating new exposures for businesses that rely on technology around the world. According to an alert issued last year by the U. In certain cases, the losses can be even greater. Virtual money, such as bitcoin, is gaining popularity among merchants and other sectors of the economy as it becomes more mainstream.

Thieves have found ways to steal significant amounts of virtual currency by hacking into computer systems. The theft caused the exchange to halt trading. While scams have become more sophisticated, there are some steps companies can take to better protect themselves. To help avoid fraudulent impersonation scams, companies can require multifactor authentication for all significant transactions, such as call-back verification of funds transfer requests to a person other than the requestor.

They can also emphasize the need for employees to keep an eye out for suspicious e-mails. Hackers often gain access to corporate systems through an employee opening an e-mail, downloading an attachment, or verifying passwords or other confidential information.

Employees who know what looks suspicious in their inboxes can serve as an effective first line of defense. Merchants and other entities transacting business in a virtual environment may want to take similar precautions if they accept virtual currency.

Making sure their virtual currency wallet, or account, is encrypted will make it harder for thieves to steal the currency. On its website, Bitcoin recommends that users be careful where they store their money online and require two-factor authentication to access it.

The community website also suggests backing up bitcoin wallets in multiple off-line formats and using strong passwords to keep accounts safe. Of course, even the best training may not prevent a company from becoming a victim.

The endorsement is designed to be written for commercial or government entities. The endorsement would consider virtual currency to be money, as defined in the policy. However, since virtual currency is intangible in nature, the value of the stolen virtual currency would be based on the rate published by the exchange on which the virtual currency is traded. We use cookies on this site to enhance your user experience.

By continuing to use this site you are giving us your consent to place cookies on your device. Virtual currency theft Virtual money, such as bitcoin, is gaining popularity among merchants and other sectors of the economy as it becomes more mainstream. Mitigation measures While scams have become more sophisticated, there are some steps companies can take to better protect themselves.

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