31-Jan-2018

Change on the horizon: blockchain and cryptocurrencies

“You can’t stop change any more than you can stop the suns from setting.”

- Shmi Skywalker

Each day we wake up to new ideas, new visions, and a new way of doing things. There is always another way to look at what is “tried, tested and true”.

2018 is only a month in, and there is already a buzz of excitement over changes the world will see this year.

Ford is making its move into electric cars, announcing that 40 hybrid and electric vehicles are coming our way by 2022.

Intel revealed a major breakthrough in quantum computing; heralding future advances across a spectrum of fields, from cancer detection to climate change. 

SpaceX is one step closer to the maiden flight of the Falcon Heavy – the world’s first reusable rocket that will eventually bring mankind back to the moon.

A brief history of money

Electric vehicles, quantum computing and space travel aside; advances are also looming for the way we make purchases. 

The moment our earliest ancestors began to barter excess goods in exchange for what they didn’t have, the concept of money was born.  

In 600 BC, the first “official” currency was minted in Turkey, with Italy and Greece following suit with their introduction of gold and silver coins. 

Not surprisingly, China was a step ahead of the game. They had already begun printing paper – a concept that was found revolutionary by Marco Polo while he was there. He brought the idea back to Europe...and the rest as they say, is history.  

With currency in their pockets, traders were now free to roam continents and oceans in order to buy and sell their goods. Suddenly the world was more connected than it had ever been. 

As time went on, we began to think of even better ways to make transactions. Our first electronic fund transfer was sent in 1860 via telegram. The debut of the first credit card came in 1946. By 1994 we were able to order pizza online thanks to the World Wide Web, and at the end of the decade we were web browsing with our phones. 

This brief snapshot of our history shows that we are very good at changing the way we do things. The last 20 years alone have seen a rapid advancement in technology. We have now reached the point where every passing second brings about new waves of change. 

The Bitcoin noise

Bitcoin, blockchain and cryptocurrency – amidst all of the world’s chatter on these topics, we often hear the terms used interchangeably. It is important to understand the differences between these three similar but very distinct concepts. 

Cryptocurrency is any digital form of exchange. 

Bitcoin is only one of many cryptocurrencies out there, but it is arguably the most well-known.

Blockchain is the technology that makes cryptocurrency transactions possible. Having said that, it is not limited to cryptocurrency. All sorts of transactions can be made.

Who is using blockchain technology?

Technology placed in human hands can be used for both good and ill. While blockchain has a somewhat tarnished reputation of being the tool of choice for dark web lurkers and cyber criminals, it arguably does more good than ill:

NONPROFITS AND AID GROUPS:  The BitGive Foundation boosts accountability of charities by allowing donors to track in real time precisely where their funds are going. Meanwhile, the United Nations World Food Program uses blockchain for Syrian refugees in Jordan, who are able to purchase food by using a scan of their eye.

GOVERNMENTS: Dubai’s government is beginning to integrate blockchain into many administrative services; including business registration, trade, and central bank operations. Delaware and Illinois use blockchain for birth certificates. Estonia’s government is piloting blockchain-based solutions for voting. And governments around the world are investigating how blockchain can be used to collect taxes.

FINANCIAL INSTITUTIONS: Global banks and investment institutions are looking at blockchain projects to reduce fraud, increase security, lower processing costs, and implement smart contracts – contracts that will automate invoicing as we know it.

MIGRANT WORKERS: Those who work abroad and send money back home have realised that Bitcoin costs less than using Western Union. An estimated 20 percent of international remittances between South Korea and the Philippines now rely on the cryptocurrency and the technology that makes it happen.  

Of course, last, but not least –

CAPTIVE INSURANCE: While blockchain has yet to be hacked, there is always the element of risk that comes with technology, no matter how unlikely. Xapo, a company that acts as a “vault” to store your Bitcoins (also known as a wallet) uses a captive to insure its users’ cryptocurrency.

Insurance and Bitcoin

Coinbase (another Bitcoin wallet provider) reassure their users that they are insured against theft and hacking –although they make it clear they are not covered for Bitcoin loss due to negligence.

Insurance will certainly play its part in this new world of Bitcoin and blockchain, but what about the other way around? How will Bitcoin and blockchain impact the insurance industry?

Global insurance provider Allianz have tried to answer this question.

Last year they successfully trialled a blockchain prototype that promises to simplify complicated captive insurance programs. Blockchain will connect all parties involved in the captive insurance industry for easy sharing and information processing. Transactions and data entries will also be recorded and distributed in real time, allowing for a faster, more transparent, and more efficient way of distributing the industry’s information.

And that’s not all.

As mentioned before, smart contracts will play an enormous role in how organisations do business. In the case of insurance, once a policy is written and stored on the blockchain, it can be programmed to monitor the risk round the clock.

Should the risk occur, the smart contract will make an automatic payout without the policyholder having to make a claim, or the insurer having to administer the claim. The cost of claims processing goes away. The opportunity for fraud also goes away.

Because smart contracts will make automatic payments based on a contract that is previously agreed, a sense of trust is instilled in policyholders, who will no longer have to rely on the insurer’s decision to pay out. 

Bringing faith back to technology

Whether you are a skeptic or believer, blockchain and cryptocurrencies are already shaking up the world. This technology is still in its infancy, yet it urges us to think differently about our daily routine. 

As always, change is on the horizon.

 “A lot of us got into technology because we believed it can be a decentralizing force that puts more power in people’s hands. Back in the 1990s and 2000s, most people believed technology would be a decentralizing force.

But today, many people have lost faith in that promise. With the rise of a small number of big tech companies – and governments using technology to watch their citizens – many people now believe technology only centralizes power rather than decentralizes it.

There are important counter-trends to this – like encryption and cryptocurrency – that take power from centralized systems and put it back into people’s hands. But they come with the risk of being harder to control. I’m interested to go deeper and study the positive and negative aspects of these technologies, and how best to use them in our services.”

- Mark Zuckerberg 

Cayman Captive Forum

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