With the increasing digitalisation of the financial services business, it was only a matter of time before someone came up with the idea of a digital currency or digital tokens.
The recent travails of FTX and BlockFi, coupled with earlier crypto hiccoughs, have given institutional investors pause for thought as to how crypto should be seen.
The original idea might have been that cryptocurrency was a medium of exchange (the clue is in the name – ‘currency’), but it rapidly evolved into an asset class that was bought and sold like any other intangible asset.
The European Central Bank in a recent blog said that bitcoin was unsuitable both as a payment method and an investment asset. “Bitcoin has never been used to any significant extent for legal real-world transactions,” said the ECB. “It does not generate cash flow (like real estate) or dividends (like equities), cannot be used productively (like commodities) or provide social benefit (like gold).”
From an insurance industry perspective, the rise of cryptocurrencies offered both opportunities and threats.
The opportunities lay both on the underwriting side of the business where new insurance products could be engineered to offer protection for customers using cryptocurrencies – as well as on the investment side, where insurers could follow other large institutional investors in holding a new asset whose value seemed to increase continually.
The threats were manifold – including light or non-existent regulation – opacity of some of the crypto exchanges, crypto banks and crypto brokers that had sprung up – and, perhaps the greatest threat of them all, the fact that people did not really understand what cryptocurrencies were.
It is easy to parrot a paragraph published online about how supercomputers mine digital tokens by cracking heavily encrypted puzzles to produce digital tokens, but how many institutional asset managers actually understood the technical gobbledygook?
They buy real estate, precious metals, US Treasuries, UK Gilts, equities and myriad other assets which they understand. But do they understand crypto well enough to invest their assets?
Then there is the reputational issue of cryptocurrencies as the currency of fringe dwellers demanding ransom payments from corporates with inadequate cyber protection - or for terrorists hoping to buy illegal products on the dark web. But, as we have asked in the past, do mums and dads want to pay insurance premiums using them?
After a flurry of stories in 2021 (AXA Switzerland allowing customers to pay their bills with bitcoin and Metromile, a US-headquartered motor insurer, allowing bitcoin for insurance premium and claim payments), the industry seems to have moved the adoption of crypto to the back burner.
Academic research suggests that there are four requirements for all international currencies. They 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.
It’s not hard to see that most, if not all, cryptocurrencies fail this test as a medium of exchange. Whether they pass the test as an investable asset for insurance asset managers is a debate that may rage for some time.
Which leaves the industry with the opportunity of crypto as a new category of risk for which they could develop products. There is likely to be no lack of demand for such products. The question will be how insurers make it profitable.
Paul McNamara
Editorial director
Asia Insurance Review