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August 9, 2016

Can Blockchains Be Insured?

Summary:

There is good news and bad news. The solution is to align insurance with engineering on a shared database.

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Are blockchains insurable? This question was posed as a topic for presentation by the Center of Insurance Policy and Research, a research arm of the National Association of Insurance Commissioners (CIPR/NAIC).

The trigger appears to be that some insurance companies are being asked to insure the business operations of blockchain enterprises. This same question would apply to legacy businesses that may choose to use or participate in a blockchain, which is basically a shared database managed by software. If one listens to blockchain activists, this issue could apply to everyone in the near future.

The Ingenesist Project volunteered the following opinion to the question: “Are blockchains insurable?”

The article is long and comprehensive, but the implications are staggering. The article begins by describing the landscape of finance and entrepreneurship in terms of insurability. It follows with, in essence, a mathematical proof that blockchains are indeed insurable but that business processes using blockchains may not be.

Luckily, the technology offers sufficient mathematical underpinning to adequately calculate risk and thereby pool risk exposures of its components. However, trouble arises when digital assets can neither be treated as money nor as property. As such, an extralegal condition may exist that would be categorically non-insurable in mainstream finance.

See also: Why Insurers Caught the Blockchain Bug  

“Extralegal” refers to a condition where something is neither legal nor illegal. Economist Hernando De Soto writes about how the extralegal sector in many parts of the world grossly inhibits economic growth because people are unable to secure “title” to property and businesses they create. They are unable to bridge the capitalization gap — that is, the ability to borrow against tangible assets or future returns.

Blockchain technology appears to be languishing in the extralegal domain as courts and governments have few uniform ideas about how and where this tech fits in society — that is, until something goes wrong, such as a major hack where important people lose a lot of money. Only then will some patchwork of blanket legislation likely emerge that favors those of one sector over another. The running joke in crypto-space is that any effort to control blockchain technology would negate any benefits of having it one in the first place.

A Third Option

The CIPR/NAIC article raises the possibility that the pairing of blockchain technology with professional engineers (as the decentralized adjudicators of smart contracts) would achieve a state of insurability and thus bridge the capitalization gap required for mainstream financing of blockchain enterprise. This arrangement applies primarily to basic infrastructure and derivatives of basic infrastructure, which may not actually be a bad thing at all.

See also: What Is and What Isn’t a Blockchain?  

The Critical Path

The Earth is currently an epic case study in deferred maintenance. There are very real and serious global problems that affect every living creature that we need to attend to immediately. Critical path methodology is a technique familiar to all builders as a set of instructions specifying where one action must precede the next for subsequent actions to occur. Millions of business plans that provide basic human needs and protect our natural resources and that are currently unprofitable will suddenly become hugely profitable.

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These outcomes could be accomplished with the recommendations provided within the CIPR/NAIC article. Please read this article and forward it to others who are interested in this technology. There is very real value to be released and money to be made in the next economic paradigm that is currently at our fingertips. All we need to do is align insurance with engineering on a shared database.

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About the Author

Daniel R. Robles, PE, MBA is the founder of The Ingenesist Project (TIP), whose objective is to research, develop and publish applications of blockchain technology related to the financial services and infrastructure engineering industries.

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