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.
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.
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.
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.
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.