There are opportunities and obstacles in the fast-moving cryptocurrency market, according to Rishi Baviskar, cyber expert group leader at Allianz Risk Consulting.
The cryptocurrency business has caught the eye of the insurance industry, with carriers and brokers getting involved despite its controversial image.
“The opportunities are quite vast for specialty insurers as it opens up the doors to potential new premium growth,” says Mr Baviskar. He points to insurance solutions already available in the market for cryptocurrency online storage (so-called ‘wallets’), crypto exchanges and smart contracts.
Crypto technology could also have potential for premium and claims payments in relation to insurers’ underwriting, Mr Baviskar says. But it won’t be straightforward, due to the inherent volatility of cryptocurrency.
“Fluctuations are to be expected given the of nature crypto against ‘fiat’ currencies; the value tends to be volatile and valuation can be very different from the time of the occurrence of the event to the actual date the claim is paid,” he says.
At the time of writing, Bitcoin’s market cap was more than $641bn, while Ethereum was over $307bn – but predictions on the future price of cryptocurrencies vary wildly. Prices have seesawed, sometimes as a result of a throwaway comment by influential business names such as Tesla’s Elon Musk.
The complexity of the technology is also a potential brake on the use of crypto for payments. Mr Baviskar says: “The transfer process of bitcoin needs improvement for it to be a desired method of choice; currently the transaction processing time can be quite slow depending on the value of the bitcoin you are sending, due to the verification process.”
There are other big challenges for insurers to bear in mind: “In addition, regulatory requirements must be considered and the adoption rate of this method of payment, while growing, is still quite low. The risk of security breaches remains and must be a part of the consideration.”
Earlier this year, hackers stole about $600m (£433m) in one the largest cryptocurrency heists ever. The blockchain site Poly Network said hackers had exploited a vulnerability in its system and taken thousands of digital tokens such as Ether.
The acceptance of crypto business by regulators is particularly uncertain. Earlier this year, the Chinese government announced it was putting a stop to cryptocurrency mining, because it was launching its own state-backed digital currency.
Meanwhile, the UK recently moved to ban the crypto exchange Binance. In a statement, the Financial Conduct Authority said that Binance Markets Ltd, the UK division of Binance, “is not permitted to undertake any regulated activity in the UK”.
“There is still a low adoption rate due to regulatory restrictions in countries such as the US, Korea and India – not to mention China, which has taken the view of restricting crypto altogether,” Mr Baviskar says.
“Crypto exchanges are decentralised and have loose restrictions with respect to transactions, which means there is little control of the type of transactions and a high potential for illegal activity such as money laundering and others.
“There will need to be some element of control imposed and proper taxation of crypto before it becomes a mainstream digital currency and a mode of acceptable payment worldwide.”
But these apparently major drawbacks are unlikely to stop crypto in its tracks. The future of a decentralised network, blockchain solutions and smart contracts such as Ethereum is looking more and more promising with respect to the way future transactions are processed, Mr Baviskar believes.
“Despite the uncertainly, crypto assets have still managed to attract widespread diverse interest from investors including individuals, retail and institutions, as they provide a new platform for creating decentralised finance projects that are up and coming from the largest technology companies,” he explains.