November 2020

Introduction

This year marked the tenth anniversary of “Bitcoin Pizza Day”, when technology enthusiast, Laszlo Hanyecz, agreed to pay 10,000 Bitcoin for two pizzas, representing the first ever real-world purchase using Bitcoin. At that time, 10,000 Bitcoin represented around $41 USD (£30.98). Today this figure is over $180m USD (£137m), and at Bitcoin’s peak would have reached $200m USD (£155m)!

The rollercoaster journey experienced by the valuation of Bitcoin has some parallels with the hype surrounding the underlying technology itself: namely distributed ledger technologies (aka blockchain). We have seen some impressive progress and innovative applications of blockchain, but much of this has been marred by early criminal applications and by overly grand claims as to what blockchain could deliver in a short space of time. Adding to the complexity, the technology itself has proliferated and evolved into more of an ecosystem of related technologies, which are increasingly distant from the original Bitcoin blockchain.

August 2018

Blockchain: A Rollercoaster Ride— Pacific Life Re Re:think By Charles King | Director, Pricing | Europe

“Certain properties that blockchain solutions can deliver, including decentralised ownership and immutability of records, lend themselves well to situations where there is a need to achieve surety between parties with competing interests...”

At various points over the last ten years, proponents have: sounded the death knell of the banking system, labelled blockchain “the new Internet”, and promoted it as a solution to everything from fraud to human trafficking. This has left many observers to note that, for many of the early applications of blockchain technology, there were cheaper, faster, better and simpler existing ways to achieve the same outcome.

Ten years on, we can now reflect in a more evidence-based and measured way on where the technology has proven successful, and where the most promising applications are in financial services and elsewhere.

Trust

It is increasingly clear that perhaps the strongest contender for a “killer application” of blockchain technologies is solving issues of provenance and trust. Certain properties that blockchain solutions can deliver, including decentralised ownership and immutability of records, lend themselves well to situations where there is a need to achieve surety between parties with competing interests. We have seen this applied in the form of smart contracts (blockchain-based, automatically executing agreements) in a number of parametric insurance products. One such example is NTUC Income’s Life Insurance product in Singapore, utilising Lifechain. More widely, there are strong emerging applications in the fields of digital identity, data integrity, and ESG reporting; leading the World Economic Forum to publish their Blockchain Development Toolkit earlier this year.

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Source: Pacific Life Re analysis of market information

Efficiency

Distributed ledger technologies are important because ledgers are important. And ledgers are everywhere. A well designed blockchain solution could deliver consensus, provenance, immutability and finality across multiple parities managing multiple ledgers - and in doing so could eliminate work that would previously have been duplicated again and again. The Institute of Chartered Accountants commented that “Blockchain is a replacement for bookkeeping and reconciliation work. This could threaten the work of accountants in those areas, while adding strength to those focused on providing value elsewhere. For example, in due diligence in mergers and acquisitions, distributed consensus over key figures allows more time to be spent on judgemental areas and advice, and an overall faster process”.

The same could be said about many other professionals involved in the insurance value chain, including actuaries, underwriters, administrators and lawyers. Blockchain is being used as a catalyst for rethinking legacy approaches, and in doing so has the power to help free-up time to focus on more value-adding work. Innovations such as AIA Hong Kong’s blockchain-enabled bancassurance network & Prudential Singapore’s Fasttrack Trade partnership with StarHub demonstrate this well. Regardless of the actual role blockchain technologies play in the solutions developed, it is clear that challenging questions are being asked about the lack of standardisation, automation and efficiency across the industry and we are being forced to rethink our processes.

Tokenisation

Tokenisation is the process of converting the rights to an asset into a token that can be stored and exchanged on a blockchain system. Applications are seemingly limitless and we have seen diamonds, artwork, and even classic cars tokenised and traded using blockchain platforms. Given the right regulatory environment anything could be tokenised, including both fungible and non-fungible assets, and even securitisations of insurance risk itself. This is a fast-moving area and one with the potential to unlock significant investment opportunities in previously illiquid assets in a manner which is more accessible and cheaper than traditional unit trusts or exchange traded funds.

Blockchain: A Rollercoaster Ride —

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Currencies

It was Vladimir Lenin who observed that “there are decades where nothing happens, and there are weeks where decades happen”. COVID-19 has ensured that 2020 will be a landmark year for technological progress.

With the accelerating demise of cash, we have seen significant progress in the field of Central Bank Digital Currencies (‘CBDCs’), with China currently testing a Digital Yuen and several other major economies publicly declaring a strengthened interest in this area. Undoubtedly, the progress of Facebook’s Digital Currency, Libra, has acted to emphasise the threat that, should Central Banks not progress soon in this area, there is a risk the private sector may move to occupy this space.

“With the accelerating demise of cash, we have seen significant progress in the field of Central Bank Digital Currencies (‘CBDCs’)...”

Conclusion

A decade on, blockchain technologies have advanced to form a diverse ecosystem of solutions with many applications. We are now better positioned to assess those applications with the most promising potential, notwithstanding that the pace of change remains very high. We are seeing strong applications to address issues of trust, considerable potential to act as a catalyst for operational efficiencies, and significant developments in digital assets and digital currencies which will undoubtedly affect our industry.

Due to improvements in the accessibility and standardisation of blockchain technologies, now is a good time to revisit potential use cases, although as Bill Gates reminds us “The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.”

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For more information about Pacific Life Re

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Pacific Life Re Limited (No. 825110) is registered in England and Wales and has its registered office at Tower Bridge House, St Katharine’s Way, London, E1W 1BA. Pacific Life Re Limited is authorised and regulated by the Financial Conduct Authority and Prudential Regulatory Authority in the United Kingdom (Reference Number 202620). The material contained in this booklet is for information purposes only. Pacific Life Re gives no assurance as to the completeness or accuracy of such material and accepts no responsibility for loss occasioned to any person acting or refraining from acting on the basis of such material.

©2020 Pacific Life Re Limited. All rights reserved.

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Charles KingDirector, Pricing Pacific Life Re | Europe T: +44 (0)20 7709 1927 E: charles.king@pacificlifere.com