As cryptocurrencies gain traction within financial markets, bringing the potential to infiltrate the traditional financial systems and expose re/insurers to the possibility of a bubble burst, S&P stated in a report that cryptocurrencies would need some regulation before they could have a major impact on the financial markets.
Analysts believe the current characteristics of a cryptocurrency make it more like a speculative instrument that wouldn’t disrupt global financial stability in the case its market value collapses.
Dr. Mohamed Damak, S&P Global Ratings Financial Institutions Sector Lead, said; “For now, a meaningful drop in cryptocurrencies’ market value would be just a ripple across the financial services industry, still too small to disturb stability or affect the creditworthiness of banks we rate.”
This could change if cryptocurrencies become an asset class, in which case the financial services firms and thus re/insurers could see a more gradual impact.
If cryptocurrencies’ market value were to collapse, the first line of impact would be retail investors, said S&P, adding that banks would likely be mostly insulated due to their relatively limited direct or indirect cryptocurrency exposure.
“We believe that the future success of cryptocurrencies will largely depend on the coordinated approach of global regulators and policymakers to regulate and enhance market participants’ confidence in these instruments,” added Dr. Damak.
However, the potential of cryptocurrencies’ underlying blockchain technology as a disruptor for financial and re/insurance value chains is expected to be a positive for the industry.
“If widely adopted, blockchain could have a meaningful and lasting impact on the celerity, traceability, and cost of financial transactions.
“The financial market infrastructure segment might also see benefit from cryptocurrencies and blockchain through the launch of new income-generating products, such as futures or exchanges based on cryptocurrencies, or the replacement of current practices by new ones based on blockchain,” S&P explained.
The entire value-chain of the insurance and risk transfer industry is being explored by InsurTech and blockchain technology innovators for potential disruption that would drive efficiencies.
A prototype of a blockchain powered reinsurance transaction platform was launched in September last year by the group of fifteen global insurers and reinsurers that make up the Blockchain Insurance Industry Initiative, B3i.
According to B3i an industry business case has been built for the distributed ledger platform across the whole value chain, with the firms involved concluding that a productivity gain of up to 30% is achievable.