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Connections

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2/10/2023 2:28:51 PM | 3 minute read

Digital assets and Web3: New risks, new opportunities

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Norton Rose Fulbright
Norton Rose Fulbright
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We were thrilled to be on the Innovation Stage at The Insurance Network London Market Conference earlier this week to talk about digital assets trends and technologies driving decentralized finance applications, and the relevance to the insurance sector.

Whilst the topic might seem far removed from day to day insurance operations, it is going to become increasingly important - both from the perspective of the sector taking risk onto its balance sheet; and to how it participates in a decentralized world.

We are already seeing traditional segments such as the Specie market offer cover for private keys, alongside new digital native start-ups offering new 'non-insurance' protection such as cover for failure of smart contracts, just to name two examples. At the same time major insurance carriers are buying land in the Metaverse, providing immersive moments that matter for their customers and employees, enhancing their global brands.  

The insurance sector will need to continue to assess the risks and opportunities and respond to the growing trends in the digital assets, DeFi and Web3 space.  

Here's our take on some of the trends identified:

  1. Despite the major crypto collapses of 2022 (such as stable coin Terra Luna and crypto exchange FTX) and the mass lay-offs in the tech sector in general, there is still positive news to be found.  There was greater adoption and investment into blockchain and digital assets by the traditional financial services sector.  Whilst crypto is a highly speculative asset, the total value by market capitalization topped US$1 trillion in January 2023.
  2. Global interest in Central Bank Digital Currencies (CBDCs) continued albeit perhaps not at the pace some expected. The dampened sentiment was somewhat lifted by the recent announcement by the UK Treasury and the Bank of England this week that it was experimenting with a digital pound – although not to be expected to be built until at least 2025.
  3. According to Blockdata, interest in blockchain in the banking industry increased to 29.7% in 2022, compared to 11% in 2021, with the benefits of 24/7 liquidity, real time transactions, smart contracts and borderless transfers as key drivers.
  4. Tokenization of real world assets and securities continues to gather momentum, with an increase in institutional investors interested in seeking access to digital assets through reputable custodians.
  5. NFTs in consumer and retail markets had a major flurry of activity in 2022 especially among the top Fortune 500, with growing interest in applications in the Metaverse.
  6. Interest in decentralized autonomous organisations (DAOs) continues to gain popularity. Last week a major automotive firm announced it was experimenting with DAOs as part of its Web3 innovation, illustrating the breadth of interest.
  7. Increasing global regulation and policy are largely seen as key enablers to securing confidence and trust in DeFi, with a range of regulations and policy announced last year, such as the Markets in Crypto-Assets regulation (MiCA), in Europe, that was passed in October and is due to come into force in 2024.
  8. Decentralized digital identity continues to be an important trend to enable trust. This is a key enabler to consumer interactions in the Metaverse as the move toward meeting and transacting in the 'internet of place' becomes increasingly relevant.
  9. Sustainability of the blockchain received a major boost with ‘The Merge’ by Ethereum, moving to proof of stake consensus.  This can only be seen as welcome news. However it was not all good news on the sustainability front.  It was reported that the recent minting of the largest ever block in Bitcoin (that uses the energy consumptive proof of work mining mechanism) with an ‘on-chain Bitcoin NFT’ had used around 888 metric tonnes of carbon or the equivalent of a flight from New York to Tokyo and back 466 times. Whilst this is a controversial claim, firms will be under increasing pressure to account for GHG emissions from their crypto activity.  
  10. Finally, as will be evident by the headlines around AI applications such as ChatGPT, and, now Bard, artificial intelligence is at peak levels of hype at present. This is also true for AI crypto assets that are riding the hype wave. This publicity hides real applications of AI across all economic sectors, including insurance. Early insurance applications are in back office functions (such as automated recruitment, business processing, fraud detection and network security) and in front-of-house activities (such as risk selection, risk servicing and behavioural analysis, micro-targeting of customer segments and chat bots for customer interactions).

As with all emerging technologies considered analysis is required of the different markets, technologies and associated risks in order to take full advantage of the opportunities they present. What is clear is that there appears to be a decoupling of the perceptions around the risky crypto plays and associated root causes, from the broader sentiment of the incredible potential afforded by decentralized systems, digital assets and tokenization, enabled by Web3 technologies.

With thanks to Professor Peter McBurney for contributing to this article.

"The fall of crypto exchange FTX and the domino effect it has had may have rekindled interest in DeFi and its associated products," said Julian Hosp, co-founder of the DeFi platform DeFiChain.
www.blockdata.tech/...

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