One of bitcoin’s key pillars is scarcity. It is widely accepted that Satoshi Nakamoto created bitcoin with the intent to limit the number of bitcoins to be mined — 21 million, to be exact. To control this within the bitcoin blockchain, the reward for mining new bitcoin is reduced by 50% every four years or when an additional 210,000 bitcoins are mined.
In the digital asset world, this event is known as the "halving.” And the next one is coming up soon.
Why does the halving matter?
The ultimate goal of the halving is to manage supply and demand by reducing both miner rewards and the rate at which new bitcoins are produced. The last halving occurred in May 2020 and the next is projected to occur as early as mid-April. More halvings will be carried out until the 21 million bitcoin are mined, which is estimated to be completed in 2140.
Every halving event to date has had a ripple effect throughout the digital asset ecosystem, driving the price of bitcoin up over the following months. But one group is especially affected: bitcoin miners, whose revenue is cut in half. This puts a strain on miners’ operating profitability and balance sheets. Miners have proven to be resilient, as exemplified by their weathering of the recent crypto winter, and have been preparing for the upcoming halving event in numerous ways.
For example, some have looked to diversify revenue streams by exploring expanding their operations to include artificial intelligence (AI) operations or Ethereum mining, but the reduction in revenue from the halving will undoubtedly affect their top line. We could also see increased M&A activity throughout the space as more established, well-positioned miners look to take advantage of financially strained mining operations.
How insurance can help
The halving has the potential to hurt miner profitability and to increase pressure on balance sheets and debt management. Leading up to and after the halving, mining boards’ decisions will be heavily scrutinized by investors, shareholders, and outside stakeholders.
Mining organizations can address these potential heightened exposures through comprehensive directors and officers liability (D&O) insurance programs. D&O insurance is designed to protect both a company’s balance sheet along with the individuals running the company (and, sometimes, its employees) against claims of alleged securities law violations and breaches of duties. These claims can be brought by investors, shareholders, limited partners, and regulators, among others.
D&O insurance is typically comprised of three separate insuring agreements:
Side A coverage (personal asset protection) provides insurance for individual directors and officers when not indemnified by the company they serve;
Side B coverage (balance sheet protection) reimburses an insured company for its indemnification of a director or officers; and
Side C coverage protects the company itself when it is sued.
As we approach the halving, it’s important that miners have the right D&O structures in place to ensure their organizations and senior leaders are protected. Specifically, mining organizations should make sure their D&O insurance programs include:
Adequate policy limits. Work with an experienced broker to utilize analytics, benchmarking, and industry historical loss information to select the proper limit based on your specific company’s operational risk profile. This information can also be leveraged to build a program with the right mix of traditional ABC limits and Side A coverage.
The broadest available coverage for regulatory investigations and actions. Depending on a mining organization’s risk profile and market appetite, coverage for informal and formal regulatory investigations should be a focus. With continued regulatory uncertainty and heightened exposures associated with the halving, this coverage is key for mining buyers.
The narrowest exclusionary language. Work with an experienced digital asset broker to finetune the exclusionary language in your policy. Pay especially close attention to the professional services exclusion, the cyber exclusion, and the contract exclusion.
The right insurance advisor
Having the right D&O insurance coverage in place can help alleviate some of the potential threats mining boards may face in connection with the upcoming halving event. Given how quickly insurance markets are adjusting to the digital asset ecosystem, organizations should look for a broker with specific expertise in the digital asset ecosystem — ideally, one that is in the market daily.
Among other actions, the right broker can:
Address pertinent questions from insurers that are unfamiliar with the digital asset space, and position your organization in the best possible light to underwriters.
Review your existing insurance coverage, negotiate favorable policy language to reduce gaps in coverage, and secure coverage carvebacks, adequate limits, and competitive pricing.
Deliver zealous claims advocacy in the event of litigation or regulatory activity, and work with you to resolve even the most complex or contentious claim.
For more on the halving and how you can prepare for and respond to it, email Lockton’s Emerging Asset Protection (LEAP) team at LEAP@lockton.com (opens a new window) or visit the LEAP team webpage by clicking here (opens a new window).
