Top trends in distributed ledger technology

As the dust settles on what was another milestone year for distributed ledger technology, it'll come as no surprise that we anticipate great potential for digital asset businesses in 2022. You don’t need to look far to find some truly mind-blowing statistics on the growth these technologies have experienced to date:

• Cryptocurrencies hit a high of $3 trillion in 2021
• Bitcoin soared to a record $69,000 in November 2021
• 1 in 10 investors in the US are now investing in cryptocurrency, with 65% investing in these assets for the first time in 2021

And this growth shows no sign of slowing as more and more realise the opportunities these technologies present. But what does that mean for insurance?

Based on the challenges we’ve been helping our clients overcome in the last 12 months and where we believe the natural progression to be this year, here are some of our predictions for digital asset insurance in 2022.

The trends that will drive distributed ledger technology forward

1. Cryptocurrency will continue to grow as a recognised currency – it won’t be strange to hold GBP, USD, EUR and crypto assets in your wallet. It also won’t be strange to have exposure to crypto in your investment portfolio. This is further cemented by the approval of the first Bitcoin ETF in the US.

A digital wallet will not only hold currency (digital and fiat) but also hold your ID, your NFTs, any proof of attendance and other digital assets you acquire. This information will be accepted by a large number of websites, and to interact with Web 3.0 websites a user will need their wallet. This concept will seem more natural this year with more people opting to open these digital asset wallets like MetaMask.

2. NFT partnership announcements will accelerate – brace yourselves for more big partnership announcements that will help fans engage with their favourite artists and media like never before.

The common perception is that NFTs are just art, where in actual fact NFTs are a gateway to user participation. What if you were able to vote on the style of your favourite singer’s next song? What if owning their NFT gave you exclusive access to merchandise, backstage access and exclusive events? NFTs are redefining the interaction between fans and the object of fandom.

3. Self Sovereign ID (SSI) will remain the missing part of Web 3.0 – self sovereign ID is a universal digital identity that a user manages, which isn’t owned by a tech firm – think of a digital version of your birth certificate or drivers licence used to prove your identity.

This capability essentially underpins a number of the other developments in Web 3.0. Data sovereignty is still not well understood so we think this area will be largely under-utilised in 2022.

4. International adoption will vary – more bans, more political uncertainty, nothing new here. Some countries will ban cryptocurrency, more will find use cases for it that enhance their economies.

As more countries look at this space with interest, there will be different approaches to the technology, some will choose to regulate it heavily or ban it altogether (like China). It's worth recognising that governments that ban digital assets like Bitcoin usually only do so in order to launch their own sovereign central bank digital currency (CBDC).

5. Crypto will be used as an inflation hedge – we’re set for record inflation in 2022 and most crypto-savvy investors know that crypto cannot inflate, and so will be increasingly storing their investments into these assets as a hedge against the coming inflation.

Many traditional investors are increasingly worried about this inflation and are seeking assets they can hold for a longer period of time, that have a great track record of gains in the long term.

The trends in protecting digital asset businesses

1. Insurers' appetite remains hesitant, but will open up by the end of the year – we’ll be seeing more crypto insurance products in the mix and more capacity will start opening up by September, based on the conversations we’ve been having and the natural cycle that new product development takes.

2. We’ll see the first ‘crypto only’ insurance brokerages – it’s only a matter of time before an insurance broker completely focused on crypto is born. There are a number of barriers to entry for new brokers focusing only in this space so the viability of this remains to be seen, but nonetheless we expect it to happen.

3. On-chain insurance protocols will develop further, even moving into more traditional lines of insurance – insurers operating using a decentralised finance (DeFi) approach are so far sticking to on-chain loss, i.e. the transaction takes place within the blockchain.

It is not, however, a very big jump from on-chain loss to off-chain. This development will happen but it is largely down to the broker to navigate how to effectively use these different risk transfer mechanisms, which could slow down adoption in a big way as there is a large education barrier to overcome.

4. Blockchain in insurance is further away – the opportunity in insuring blockchain companies remains much greater than adopting blockchain technology in insurance. We're much more believers in insuring blockchain companies than trying to force insurance into a blockchain model.

With the slight exception of parametric solutions, there is very little in the way of evidence of a viable insurance model that needs blockchain, and this is currently better managed by a good accounting management system that can connect to others via API.

5. Employment opportunities! – insurers and brokers will need workers who truly understand this technology. There is a very large opportunity for insurance professionals to up-skill in this space and become much more valuable to their employers due to the specialism.

It’s not hyperbole to suggest that, in terms of insurance, the opportunities available in distributed ledger technology and unlocking the protection needs of businesses that operate in this space is unlike anything we’ve seen in the last decade.

As these technologies become much more accessible it’s never been easier for someone to learn about cryptocurrency, and the technology behind it, and resources to help you discover this industry are plentiful.

As individuals’ understanding of digital assets grows, it’s becoming harder for companies to ignore the opportunities this technology presents.

Anecdotally, when speaking with a CFO with 25 year’s experience in very large financial institutions about digital assets and the metaverse, they said “I don’t know much about this space, but I’m learning as I’ve recognised ignorance isn’t a viable excuse to not get involved”. This sentiment is growing and shows that even senior leaders in traditional insurance are realising the opportunity this technology presents. 2022 is set to be an extremely pivotal year for crypto and insurance has an important part to play in helping this industry achieve their goals.

At Superscript, we are experts in building insurance products to help drive the growth in distributed ledger technology. If you’re building technology or services in this space and would like to learn what insurance options look like, you can book a call with one of our experts here.

Ben Davis has over a decade of experience in the insurance industry, with a career that spans broking, underwriting and consulting. He has a particular specialism in blockchain and crypto assets and wrote the first ever UK consumer Bitcoin theft insurance policy.

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