U.S. insurance company direct investments in cryptocurrencies is in its infancy and may stay that way. In large part this is due to cryptocurrencies being non-admitted assets. Cryptocurrencies are not cash under Statement of Statutory Accounting Principles (SSAP) No. 2R,[1] because cryptocurrencies are not a medium of exchange that a bank or other similar financial institution will accept for deposit and allow an immediate credit to the depositor’s account. In April 2021, the Statutory Accounting Principles (E) Working Group (SAPWG) determined that if an insurer directly invests in cryptocurrencies, the investment is non-admitted. In contrast, indirect investment via mutual funds or exchange traded funds is admitted.
Cryptocurrency is a digital or virtual currency. It is intended to provide many of the same functions as currencies such as the U.S. dollar, but without a government’s backing. The purported benefits offered by cryptocurrencies include (1) the ability to make transfers without an intermediary and without geographic limitation, (2) finality of settlement, (3) lower transaction costs compared to other forms of payment and (4) the ability to publicly verify transactions.[2] Cryptocurrency is based on blockchain technology which allows the creation and editing of certifiable and permanent transactional records.
Today there are approximately 4,000 different cryptocurrencies available on about 200 different cryptocurrency exchanges. Cryptocurrencies have seen significant price volatility and have experienced an extreme increase in value nearing $1 trillion as of February 2021.[3]
The SAPWG’s initial discussion was to only consider insurers directly investing in cryptocurrencies and not indirect investments via cryptocurrency mutual funds. This reveals a distinction between what is an admitted versus non-admitted asset. SSAP No. 30R[4] does not limit an insurer’s investments in mutual funds. If the insurer invests in a Securities and Exchange Commission (SEC) registered fund, such as an exchange traded fund, the statutory accounting guidance is to follow SSAP No. 30R. Specifically, SSAP No. 30R’s paragraph 4(c) and (d) includes SEC registered funds regardless of the fund’s mix or type of securities owned. The reporting of this investment would be in Schedule D, Part 2, Section 2 (Common Stocks) of the annual statement.
If the cryptocurrency fund is not SEC registered, then per SSAP No. 48,[5] the investment receives treatment as a private fund or joint venture, which results in reporting in Schedule BA of the annual statement. Whether the fund is SEC registered or not, an insurer may indirectly invest in cryptocurrencies via purchasing mutual fund shares and report the investment as an admitted asset so long as the reporting complies with SSAP No. 30R or 48.