Tokenizing the Insurance Business
Blockchain technology has disrupted both, technology, and the way business is done. Cryptographic token economies stand out amongst the most common models implemented on top of blockchain technology. Tokens are digital representations of assets. Native cryptocurrencies, such as Bitcoin or Ether, are tokens. However, modern blockchain-based applications usually implement their own tokens on top of blockchains, in the form of smart contract. This higher-level abstraction provides more control over the token’s key parameters and functionalities and allows for additional business logic to be incorporated.
Blockchain-based insurance platforms, such as Black Insurance, also benefit from token economies. However, before going into detail on how tokens are relevant to the insurance industry, let’s first have a look at how tokens are used in general.
Types of Tokens
There are two fundamental types of assets that can be represented as tokens: Fungible assets and non-fungible assets. Fungible assets are interchangeable, meaning each unit of the asset is exactly the same and holds the same value. An example of a fungible asset is a currency, such as the US dollar. All one-dollar units hold exactly the same value and are interchangeable. Fungible assets can be divisible. The dollar can be divided into cents.
Non-fungible assets on the other hand are unique and not interchangeable. Gold bars, for example, are distinguishable by their weight and purity. Each bar may have a different value. Non-fungible assets are also not divisible.
Both, fungible assets, and non-fungible assets, can be represented digitally by a token on blockchain. As non-fungible tokens require more data to be stored to identify each individual unit, the management of this type of token is usually slightly more complex.
Fungible tokens on the other hand are simple numbers associated with accounts. Transfers of a certain number of tokens between accounts represent value transfers. Blockchain-based platforms tend to use fungible tokens to implement tokenized economies. However, non-fungible tokens can also be found, usually in combination with fungible tokens representing pricing.
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Token Purpose
Fungible tokens can be classified according to their purpose.
An asset token simply represents an asset in a one-to-one relationship. For example, one litter of gasoline may be represented by a certain number of gas tokens.
Utility tokens provide access to platform functionalities. They may act as an in-app currency used for accessing certain features, or may be awarded to users in exchange for activities.
Finally, security tokens represent an investment in the platform, similar to equities. Security token holders buy the token in the hope of value increases with an expectation of profit.
Classifying tokens in this way is important, because of regulatory implications. Securities fall under tight investment regulations in most jurisdictions. This means that security tokens may only be legally obtainable by accredited investors. Many projects prefer to stick to utility tokens for this very reason.
Insurance Platform Assets
In the insurance industry tokens can be a very useful abstraction. In fact, tokens are the key ingredient enabling smart contract-based insurances on the Black Insurance platform.
There are several concepts in the insurance business that benefit from being tokenized. On one side of the equation, a fungible token can act as an in-application currency to enable platform interaction. Insurance premiums can be paid in this type of token and claims can be paid out. In this particular case, the token has a utility function.
On the side, investors can use a token to invest in insurance products and provide the funds for underwriting policies. Insurance investors clearly do this with an expectation of profit. Thus, the token takes on a security role.
Black Insurance Tokens
We introduced the Black Insurance platform in a previous article. The Black model clearly distinguishes the roles of platform users and insurance underwriters. Both parties interact with the platform for different reasons and with a different purpose.
Whilst many Blockchain projects shy away from the regulatory requirements security tokens might bring and desperately try to justify their tokens as utility tokens, Black Insurance embraces the security paradigm for insurance underwriters. Limiting this type of activity to accredited investors is seen as as advantage, rather than an inconvenience. Insurance underwriting is clearly a serious business and regulation adds security to the platform and protects its end-users.
For this reason Black Insurance divides the token economy into two types of tokens.
The Black Platform Token (BLCK) is a utility token which enables access to platform services. BLCK are spent when interacting with smart contracts. Insurance premiums and claim payouts are processed in BLCK and the token is accessible to all types of users.
Various Black Syndicate Tokens (BST) are accessible to accredited investors only. Each BST security token represents an investment in an insurance syndicate. The funds of an individual syndicate are used to underwrite insurance products.
As explained in an earlier article, tokens on the Black platform exist on both, a permissioned consortium blockchain, and the public Ethereum chain. The assets can be moved between the chains through a special gateway functionality.
Black Insurance makes use of the ERC-20 and ERC-223 standards for fungible tokens. These Ethereum-specific standards provide a common interface for tokens, guaranteeing compatibility with standard-compliant wallet software, libraries and secondary markets. The tokens on the Hyperledger Fabric-based permissioned blockchain of the Black Insurance platform mirror this standard interface to enable seamless cross-blockchain asset migration.
Final Thoughts
The blockchain’s ability to represent transferrable digital assets enables many interesting applications. These cryptographically secured assets allow creating innovative in-application token economies.
However, it is important to clearly define a token’s role and how it fits into generic financial regulations and industry-specific norms. Black Insurance is working on tokenizing the insurance industry, opening up opportunities for new paradigms and innovative insurance products. In contrast to other projects, Black Insurance embraces security regulation and is seeking compliance, dividing its token economy into specific roles and functionalities.
