Insurance Lead – International and Emerging Risks
Blockchain and digital currencies have been at the centre of the hype surrounding tech and digital businesses for a while now, and many of us want a simple break down of how they work, how to benefit from them and what the future of this tech will bring.
Superscript took part in “Insuring Web 3.0”, an insightful event organised by Next Generation Insurance Network, where we spoke about demystifying blockchain and cryptocurrencies as well as looking at these innovations from an insurance perspective. Here, we have gathered the most important tidbits from the talk.
The genesis of the Web
In the past 30 years, internet technology has evolved drastically. Web 1.0 gave millions of people access to the great invention of the internet, but was plagued with problems ranging from connectivity to speed and user experience. As more money and talent was put towards Web 1.0, it eventually led to Web 2.0, distinguished by the proliferation of data sharing. It led to entire economies living online and was marked by the rise of machine, platform and crowd. This was exemplified by the development of AI & robotics, eBay and Amazon, as well as sites like Facebook, Wikipedia, Kickstarter and others. All these platforms have enabled users to send and share data anywhere in the world in a simple, fast and seamless way.
Unsurprisingly, along with the rise of data came the need for protecting it from being compromised. Consequently, we started relying on costly middlemen collecting and monetising that data and, simultaneously, taking a certain percentage of any value we transfer online. There had to be a better way.
Web 3.0 era
The building blocks of Web 3.0 were conceived in a whitepaper by Satoshi Nakamoto - the enigmatic father of Web 3.0 technology. Satoshi outlined a new way of data sharing, value transfer and trust that would change the way people interacted with each other online and, as a result, have a major impact on many aspects of business and the global economy.
To shine a little bit of light on the concept, Web 3.0 is underpinned by the following tenants:
- Immutability (making it impossible for anyone to cover their tracks)
- Privacy (allowing users to own their data)
- Persistence (making it very difficult to hack)
- Transparency (complete visibility of the transaction history)
- Permissionless (available for anyone to join)
- Speed and cost-efficiency
The above are epitomised in the advent of a new type of data architecture, which is called a blockchain. Blockchains encompass all of the above and bring together disparate parties all over the world to run a ledger of transactions. The first such ledger was the Bitcoin ledger. Bitcoin functions as an incentive mechanism to keep the Bitcoin ledger (or blockchain) running. It incentivises people all over the world to keep running the Bitcoin software and, in turn, participate in the biggest alternative financial invention of the last 100 years. Bitcoin makes its financial services accessible to anyone, at any time, anywhere in the world.
The role of digital tokens
Many think that all tokens are created equal and for the same purpose. However, that could not be further from the truth. While it’s true that all tokens are digital units of account, secured by nodes, and (mostly) resistant to manipulation of their total supply, there is a wide variety of use cases for these tokens. Tokens are built on top of a blockchain (majority on Ethereum), and can experiment with new models of governance or economics. At the same time, they provide an end service to its holders. As the use cases for tokens are diverse, the below is the taxonomy as defined by the FCA:
1. Utility tokens
Designed for users to gain access to something (usually, a piece of software), utility tokens are normally used to run certain applications or give users a right to vote on the governance of the overall system. Ethereum, Decred and Eos are just a few examples of utility tokens.
2. Exchange tokens
Doing exactly what it says on the box, exchange tokens are primarily focused on facilitating an exchange of value between two parties, akin to traditional currency. These tokens derive their value from how strong and resilient the network is. The best example of this is Bitcoin, which has the best security among all tokens available today. Other tokens you might have heard of are Litecoin and ZCash.
3. Security tokens
These are characterised by giving the user a piece of ownership in the underlying asset. This is most akin to traditional equities. The holders of these tokens expect security tokens to generate profit due to external efforts.
All of them, despite the differences, make trading and value transfer accessible to all people, otherwise unable to do so for a variety of reasons. As you probably have already guessed, the above tokens can often overlap with each other and provide characteristics of other tokens. With blockchain unlocking access to open networks, tokens can develop open financial ecosystems, therefore, enabling a direct gateway to the next era of the web.
Insuring Web 3.0
Though blockchain makes possible a future where people can control their data as well as transfer value anywhere in the world, it is still misunderstood and somewhat feared by businesses. However, for entrepreneurs to take the associated risks and develop this technology even further, there needs to be insurance in place. A lack of insured Web 3.0 companies is often cited as the number one inhibitor for institutional investors to invest en mass in this space.
Most underwriters have approached Web 3.0 entrants with prejudice that doesn’t accurately reflect the risk. While it is true that Web 3.0 utilises new technology, there are still old risks that need to be insured. Risks, such as management liability for the running of the companies, simple contents insurance and professional indemnity. The majority of underwriters have painted each company in Web 3.0 with the same brush without considering the merits of each risk on their own.
Currently, the insurance industry is meeting these innovative new companies with inflated premiums or non-existent coverage. Traditional insurers have largely stuck their heads in the ground and declined to offer appropriate terms, while the companies who have learned and applied it themselves, are making extraordinary gains in this space. Great examples of this is the specie industry, which insures the cold storage of private keys against theft and can charge multiples of what they would normally charge a traditional financial custodian. In the future, most companies will have some sort of exposure to Web 3.0 and this will have to be reflected in the insurance program. Those insurance companies that refuse to learn about this new technology will start losing their once-valued customers to those who invested in learning and thoughtfully examined the risk, and thus, won the business. Putting your head in the sand will no longer be a viable strategy with this new economy.
A small number of insurance projects are currently pioneering the use of Web 3.0 technology for their advantage, using tokens as a means of insurance and consequently redefining the industry itself. Not only does it mean complete end-user transparency, but also, often, an automated settlement for various types of claims. Funnily enough, these new pioneers are harking back to when insurance first started as a guide on how to create new insurance models.
This is clearly a wake-up call for the insurance industry, where providers have to adapt and cater to the growing technology adoption within their promising and developing prospects. Otherwise, not only they would miss out on the increasing opportunities, but also maintain the stigma of an outdated industry. The more it stagnates, the more catching up there will be to do in the new era of decentralised finance, systems outside of centralised control and the creation of ‘money streaming’. In the future, interacting with Web 3.0 will become as familiar as sending a text message, and the change it can bring to the industry is not only exciting, but also a better version of the insurance industry today. It is up to each and every one of us to learn about Web 3.0 and, in turn, help us achieve the next logical evolution of business.