Account Manager - Digital Assets
In a significant move, the Securities and Exchange Commission (SEC) introduced a new set of regulations this week that will have a profound impact, not only on traditional financial institutions (TradFI), but also on the cryptocurrency industry – including Bitcoin miners.
These new rules bring about a new era in cybersecurity reporting; starting from 5 September 2023, US public companies will be required to promptly disclose significant cybersecurity incidents within four business days of identifying them as ‘material’ via an 8-K filing. The SEC clarified that determining materiality contemplates both qualitative and quantitative factors, a standard consistent with precedent securities law. The process of determining what is ‘material’ sets the tone for the entire disclosure.
Why are these rules being brought in?
Designed to improve investor understanding of cybersecurity risks faced by public companies and following an increase in cybersecurity threats, the new rules aim to provide additional information to investors and potential investors to assist them in making their investment decisions.
But these SEC regulations go beyond speed. They also demand an annual, detailed report via the 10-K filing on cybersecurity. This will provide investors with a comprehensive view of how a company manages its cybersecurity risks, strategies, and governance. For US-listed public companies, it moves cybersecurity from being a compliance task to a strategic necessity that no business can afford to overlook.
These regulations are a powerful tool for investors in a world where cyber threats are a real concern. They give investors the information they need to make smart investment decisions.
Breaking down the key points
In this new era of transparency, the annual report needs to cover several critical areas:
1. Risk management: companies must explain how they identify and handle cybersecurity risks. It's not just about listing the risks, but also about how they are assessed and managed.
2. Impact analysis: companies need to analyse how cybersecurity risks could affect their business strategy, financial health and day-to-day operations. It is designed to allow investors to understand the potential vulnerabilities.
3. Board oversight: the role of the Board in managing cybersecurity risks becomes central. Investors want to know how seriously the Board takes these risks and what actions they take to mitigate them.
4. Management's role: Investors are interested in how management actively deals with and manages significant cybersecurity risks. Knowing what steps management takes is crucial for investor confidence.
Impact on Bitcoin miners
Now, let's turn our attention to publicly listed Bitcoin miners. Historically, many miners haven't considered cyber insurance a priority. These SEC rules, however, could change that, because of the reasons listed below:
1. Increased exposure: Bitcoin miners operate in the digital realm, making them more vulnerable to cyber threats. Cyberattacks can disrupt operations and lead to significant financial losses. With the SEC demanding detailed cybersecurity disclosures, miners might face more scrutiny from investors and regulators.
2. Pressure points: as investors and regulators demand more transparency, Bitcoin miners, like other publicly listed crypto companies may feel compelled to not only strengthen their cybersecurity defences but also invest in cyber insurance. These companies have significant business interruption cyber exposure and they often hold substantial digital assets. A breach could have significant financial consequences. This insurance can help cushion the financial blow from breaches and operational disruptions.
3. Evolving risks: the cryptocurrency world evolves rapidly, and so do cyber threats. Miners may need to regularly reevaluate their insurance coverage to ensure it matches the emerging risks.
4. D&O Insurance: Directors’ and Officers’ (D&O) insurance may also undergo changes. As Boards take a more active role in managing cybersecurity, the risk profile for directors and officers may shift, affecting D&O insurance policies, costs and requirements.
Impact on publicly listed crypto companies
Beyond Bitcoin miners, these regulations will also affect publicly listed cryptocurrency companies like Coinbase.
These companies have enjoyed immense popularity and rapid growth, but they too must now grapple with the heightened cybersecurity scrutiny, such as:
1. Market volatility: cryptocurrency markets are notoriously volatile, and news of a significant cybersecurity incident can send shockwaves through these markets. The SEC's requirements may help these companies better prepare for and respond to incidents, potentially reducing market volatility.
2. Investor confidence: publicly listed crypto companies rely heavily on investor confidence. Cybersecurity incidents not only jeopardise financial assets but can also erode trust. By adhering to these regulations, these companies can demonstrate their commitment to transparency and security.
3. D&O Insurance: directors and officers of these companies will face renewed scrutiny. The potential impact of cybersecurity incidents on share prices could lead to D&O claims. Boards will need to ensure they are actively managing cybersecurity risks. It’s likely that D&O underwriters will have a renewed focus on a company's security posture following these new rules.
The insurance paradigm shift
One significant outcome of these regulations is likely to be a surge in the demand for cyber insurance. Historically, Bitcoin miners and other businesses have been hesitant to invest in cyber insurance, regarding it as a nice to have or an additional luxury purchase. However, the increased scrutiny and the potential financial risks associated with significant cybersecurity incidents may change this.
Directors’ and Officers’ (D&O) insurance underwriters are also expected to adjust their focus. A significant cyber loss can now materially impact a company's share price, and subsequently, result in a loss covered by D&O insurance. Therefore, underwriters will pay closer attention to a business's cybersecurity measures, recognising that lax security can lead to financial losses and D&O claims.
The SEC's new cybersecurity regulations are a turning point for many industries, including cryptocurrency mining. For Bitcoin miners, these regulations prompt a reevaluation of their cybersecurity practices and insurance strategies.
The need for transparency and the evolving risk landscape demand are going to demand a proactive approach. Reach out to our Digital Assets team for more information about how we can support you as you navigate these new regulations.
This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.
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- 05 September 20232 minute read
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