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Sep 2021

Crypto: Risk or opportunity

Source: Asia Insurance Review | Jul 2021

While many technological developments – like AI and driverless cars – could have been lifted straight from the pages of science fiction, the same cannot be said of cryptocurrencies.
 
I am not the world’s biggest reader of science fiction, but I somehow cannot imagine an author of fiction thinking that readers would be so gullible as to believe in currencies that were underpinned not by physical assets but by imaginary assets that were ‘mined’ by supercomputers in vast energy-guzzling warehouses in lightly-regulated jurisdictions.
Nevertheless, the dilemma faced by the region’s insurance community is how to treat these cryptocurrencies. Should they be viewed as a risk or an opportunity?
 
Are they, as many suspect, the latest in a long line of scams that began with snake oil via cures for baldness and recently-salted mines in the Klondike? But what if they are not? What if they are here to stay?
 
Admittedly cryptocurrencies seem to be a boon for fringe dwellers demanding ransom payments from corporates with inadequate cyber protection – or for terrorists hoping to buy illegal products on the dark web - but do mums and dads want to pay insurance premiums using them?
 
In March of this year, Marsh published a brief note on the subject that said, “The global digital asset market continues to grow at a fast clip, a trend that is likely to continue for years to come. With more organisations and governments exploring the opportunities presented by digital assets and increased regulatory clarity, there is expected to be a greater focus on insurance in 2021.”
 
Marsh goes on to say, “Higher pricing of bitcoin and other digital assets will invariably affect the insurance market. As the value of digital assets goes up, those holding the assets … tend to feel an increased need for insurance protection. And as their value grows, more ‘traditional’ financial companies are increasing their investment in digital assets either for their own investment purposes or on behalf of their clients.”
 
From an institutional asset-management perspective, the tide seems to be running against cryptocurrencies at this point as the debate rages over how ‘clean’ or ‘green’ they are from a sustainability perspective.
 
Horror stories have been emerging of the vast amounts of energy that crypto mining farms consume, which knocked the value of cryptocurrencies. In late May China vice premier Liu He reaffirmed the nation’s wish to crimp cryptocurrency mining and trading resulting in further whipsawing of their price.
 
Few institutional asset managers are likely to be willing to expose themselves to such volatility until the regulatory environment becomes much clearer.
 
And what of mums and dads? In April we read that AXA was the first all-lines insurer in Switzerland to allow its customers to pay their bills with bitcoin. In late May Forbes magazine published an article under the headline ‘Metromile will embrace bitcoin for insurance premium and claim payments.’ Metromile is a San Francisco-headquartered motor insurer.
 
According to academic research, there are four requirements for any international currency. It must have long-term stable value. There must be enough of it around to meet normal business needs. Transaction costs to buy and sell the currency must be very small. It must be backed by a stable issuer that guarantees the currency.
 
Bitcoin, for example, scores zero out of four on this measure.
 
The tide appears to be out at presents as far as cryptocurrencies go – but the tide seems to be on the turn. It will be interesting to see which, if any, of the present slew of cryptocurrencies are still afloat when then tide is high.
 
Paul McNamara
Editorial director
Asia Insurance Review
 
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