Risk Insider: Greg Bangs

No Consensus on Blockchain Standards

By: | May 18, 2017 • 3 min read
Gregory W. Bangs is chief underwriting officer of global crime at XL Catlin. Over the last 30 years, he’s been underwriting insurance and developing new products in the U.S., U.K., Hong Kong and France. He can be reached at [email protected]

Technology has transformed the way many companies transact business. And, with the advent and increasing acceptance of “blockchain” technology, we should expect even more dramatic change.

As R&I’s Roger Crombie noted in his column “The Blockchain Revolution?” there’s been an awful lot of hoopla about blockchain in the insurance industry, yet few really understand it and how it’s going to work.

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Originally developed as the technology underlying crypto-currency transactions, blockchain technology may eventually enable greater efficiency, transparency and security in a wide range of industries from financial services companies — including insurers — to many others. Before jumping on the blockchain bandwagon though, there are still some issues and risks to consider.

For one, there’s still a lack of consensus on blockchain standards and no regulatory structure addressing risk transfer and loss allocation. This may create potential exposures that need to be considered when buying insurance. Private and semi-private blockchains also present concerns around determining who has access to potentially relevant transactional information and ensuring that limitations on access are fully in place.

I’ve recently worked with my industry colleagues Scott Schmookler and Katherine Musbach, attorneys with the Chicago-based law firm, Gordon & Rees, to outline some top concerns particularly as they relate to such crimes as fraud. As we see it, while this technology intends to make fraud tougher, using it to transfer securities and negotiable instruments could potentially increase the risk. Every time a document is subjected to a copying process, a small amount of information is lost.

Originally developed as the technology underlying crypto-currency transactions, blockchain technology may eventually enable greater efficiency, transparency and security in a wide range of industries from financial services companies — including insurers — to many others. Before jumping on the blockchain bandwagon though, there are still some issues and risks to consider.

The issue is worsened with multi-generational copies, or copies of copies, many of which contain insufficient quality for examination and comparison. The key to preventing falsification of the blockchain is to make the additions costly and there are many ways to do that.

Also, blockchain transactions may be less likely to receive comprehensive reviews looking for fraud, alteration and forgery. For instance, participating institutions may not receive the original documents on which the transaction is based, and therefore may not have an opportunity to analyze their authenticity. And if the technology evolves such that original documents are no longer provided, that could increase the potential for information to be lost through hacking or through a technological failure.

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With a growing number of competing blockchain-based platforms, there is also a potential for assets to be double-pledged or for parties to enter into conflicting transactions. For example, the seller of a promissory note could use one proprietary blockchain-based platform to sell a note. Absent a means to compare transactions effected on one platform against transactions effected on another platform, the same seller could attempt to sell the same note through a different proprietary blockchain-based platform, in essence defrauding the purchaser, who — absent strict verification procedures — could be induced to unknowingly purchase a note the seller did not own.

Blockchain’s efficiency advantages must be weighed against the risks. As more businesses move forward into the brave new world of blockchain technology, they must remain mindful that this is just another means of conducting business transactions, and the time-honored principle of caveat emptor still applies. All those entering into blockchain transactions should do their due diligence.

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