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Blockchain Technology and Life Insurance

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What You Need to Know

  • Life insurers could start by using cryptocurrency as a substitute for gold.
  • Some clients will see both cryptocurrency and whole life as an escape from fractional reserve banking.
  • Rising inflation might spur both insurers and consumers to experiment more with alternatives to the dollar.

In an environment of fast-emerging crypto and blockchain technology, searches such as “Bitcoin and life insurance” are producing a wide range of content and topics.

Concerns including the likelihood of life insurance companies moving toward accepting Bitcoin, the involvement of major life insurers in buying large amounts of Bitcoin, and  the increasing investments of major life insurance in efforts to prepare to offer Bitcoin (or other cryptocurrency) investing are all front and center in the life insurance industry.

At the same time, “decentralized finance” (DeFi) — a key component in the Bitcoin and crypto infrastructure — is not only changing the game of finance, but also appears to be challenging the foundations of the financial system. Regulators are scrambling to address potential concerns, and the major crypto companies are responding in kind to educate regulators.

As the life insurance industry becomes more acquainted with Bitcoin, crypto in general and DeFi, the involvement and impact on the life insurance industry is still in its infancy.

This being the case, this article will attempt to offer an overview of the current state of affairs related to the impact of Bitcoin and the blockchain on the life insurance industry to date.

Then we will look at DeFi, first by reviewing what constitutes the modern financial infrastructure and its inherent concerns related to currency devaluation, inflation and centralized control.

Next, we will look more deeply at what DeFi really is and how it may dramatically affect the financial system in the U.S. and abroad.

Finally, we will consider the Bitcoin, crypto and DeFi horizon, as it may offer new opportunities for life insurance companies in the space.

Bitcoin

MassMutual, a top mutual whole life company, has a particular interest in Bitcoin. In December 2020, The firm purchased $100 million in Bitcoin for its general investment account and acquired an equity stake in NYDIG, a leading provider of technology and investment solutions, for a Bitcoin fund.

The deal between MassMutual and NYDIG concerning Bitcoin was predicated on what MassMutual sees as an the increasing involvement of cryptocurrencies in the financial landscape and the demand from financial professionals and their clients to gain Bitcoin exposure.

“MassMutual continues to innovate and to lead the pack when it comes to Bitcoin,” said Robert Gutmann, co-founder and CEO of NYDIG.

Blockchain

Other life insurance companies are beginning to utilize blockchain technology, a cryptographically assured form of shared record-keeping, to prevent insurance fraud, track records and file claims.

For example, MetLife is apparently using Ethereum blockchain technology to add transparency and efficiency to the life insurance claims process.

Related Questions

There are many other questions related to Bitcoin, crypto and the impact on life insurance companies, such as when various life insurance companies will start accepting Bitcoin (or other crypto) as payment or companies insuring crypto holdings.

There are also related questions such as getting insurance for crypto. For example, Lloyd’s of London has an insurance policy that protects cryptocurrencies held in online wallets. Finally, there are numerous estate planning considerations such as taxation, identification and transferring of crypto assets to future generations.

Decentralized Finance

DeFi is a fast-emerging ecosystem that allows financial products of all kinds, including coins and digital art (NFTs), to be made available on a decentralized blockchain network.

The programmable applications and protocols being created on the blockchain, the foremost of which is Ethereum, allow financial transactions to be executed automatically on the blockchain through “smart contracts” without the need for middlemen such as banks or brokerages.

Peer to Peer

Unlike for a bank or brokerage account, government-issued IDs, Social Security numbers or proof of address are not necessary in the world of DeFi. DeFi transactions make it possible for buyers, sellers, lenders and borrowers to transact “peer to peer” with only computer-based systems in place to serve as the middleman, eliminating the need for a company or institution to initiate a transaction.

Thus, DeFi is not only changing the game of finance, but, in my estimation, is also challenging the current financial system by throwing out the entire gameboard. What this will mean for DeFi, remains to be seen.

So what would a world without traditional banks look like, and how does this relate to the life insurance industry?

The Current Financial Model: Hub and Spoke

The modern financial infrastructure that most of us has come to know pretty well is characterized by a “hub and spoke” model.

Key financial centers of activity such as New York and London serve as hubs for the financial industry (banks and brokerages), which then influence economic activity at regional spokes or nerve centers such as Milan or Mumbai.

Economic activity or hardship then radiates from the spokes to the rest of the economy.

Arguably, this model has worked pretty well over last 100 years; however, a few big problems have revealed the flaws in the existing code, pun intended.

For example, the relatively recent banking crisis that led to the Great Recession showed that a few problems with the balance sheets of a few large institutions sent the global economies tumbling toward years of recession.

Another example may be found in the recent worldwide COVID-19 crisis, which demonstrates that local government policies toward business operations can also drive entire sectors of the economy (markets included) to the brink of recession.

More on this topic

There are also inherent problems that perhaps should be considered pertaining to centralized banking and fiat currencies, the foremost of which concerns the manipulation of currencies by central banks (i.e., the Federal Reserve).

Well-known Bitcoin proponent and influencer Robert Breedlove may have best summarized the emerging crypto ideology best, in talking about the printing of money as devaluation of currency. He refers to this devaluation by governments and central banks as theft or a kind of de facto taxation by governments without the political ramifications.

DeFi: An Entirely New Solution, or Revamping the Old?

Congressional officials posed the question to prominent crypto industry leadership, oversimplified here, as to whether the crypto industry is reinventing something or rehashing the old model. This questioning related largely to the advent of what are called “stable coins” tied to the U.S. dollar.

The point is that, in some ways, DeFi requires the same components for success as centralized systems. Both systems need a stable currency and a wide variety of uses and cases. DeFi components take the form of stable coins, which are dramatically increasing, and the current belief is that the central banks intend to issue their own stable coins.

But the old model vanishes with the advent of “smart contracts,” which provide the framework for the functioning of DeFi apps and services because they encode the necessary terms and activities to function with total autonomy.

For example, a smart contract for a lending app would contain the exact terms and conditions for lending and borrowing. So lending is conducted by a specific code rather than a lending institution.

To get a bit more “techy,” a software stack contains the components of a decentralized finance system. This stack would have four layers: settlement, protocol, application and aggregation.

Settlement, Protocol, Application and Aggregation Layers

An oversimplification of these layers is that the settlement layer is the programmable framework (application) such as Ethereum.

The protocol layer is where the rules are.

The application layer is where the “consumer facing” application is, such as an exchange like Coinbase.

Finally, the aggregation layer is where aggregators connect services from the previous application layer to provide a service to investors, such as lending platforms on a crypto exchange.

Despite respectable market caps such as Ethereum’s, which, as of this writing, is at just over $500 billion, DeFi is assuredly in its infancy.

The DeFi ecosystem is still plagued with structural problems, and scams are an ever-present concern.

There are also questions concerning DeFi regulatory problems due to its open and relatively distributed nature when financial regulations are designed around the idea of separate financial jurisdictions.

Still, DeFi, while uncertain, is arguably forging a valuable path toward a new kind of finance, offering access and a forum that may become more reliable than the current centralized system for the reasons discussed above.

The Inevitable Collision Between Life Insurance and Blockchain Technology

Bitcoin, DeFi and blockchain technology offers many possibilities, most of which would be highly speculative at this stage. To reiterate what we know a bit more clearly, life insurers are cautiously getting involved, as mentioned concerning forward-thinking companies such as MassMutual and MetLife.

Future adoption of blockchain technologies appears likely due to its autonomous, fast and secure nature. The expansion of Bitcoin investment by the companies themselves also appears likely as an alternative to gold and the lack of alternatives to hedge against inflation.

On another level, there are aspects to permanent life insurance and its utilization as an asset (or alternative source private financing), that is oddly synergic with the philosophies that appear to be driving the emergence of Bitcoin, blockchain and DeFi.

For example, high-cash-value whole life proponents invoke originators such as Nelson Nash in aiming sharp criticism at central banking practices like fractional reserve banking. These observations, which are decades old, square pretty well with Breedlove’s concerns about aptly named “fiat currencies.”

With all of the above in mind, we do know is that current monetary practices are driving a fair amount of concern, given inflation, huge national debt, printing currency and interest rates hanging in the balance. Only time will tell how the future is shaped by these emerging new monetary technologies and the impact on the life insurance industry as a whole.


Steve GibbsSteve Gibbs is the co-founder and owner of Insurance and Estates. He is admitted as an attorney in California and Florida, and he is a licensed life and health insurance agent in 50 states.

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(Image: Adobe Stock)