What Central Bank Digital Currencies will mean for insurance

Since the person or people behind the name Satoshi Nakamoto launched a new type of digital currency 14 years ago, governments and central banks have been working hard to find a way to compete. Demand for that first digital asset, bitcoin, is now proven, with 190mn people worldwide holding the currency. Meanwhile, stablecoins that track the price of USD (or any other fiat currency) are also on the ascendance.

Governments around the world have responded with a wave of research papers and ideas on how to create a central bank digital currency (CBDC), while ignoring or banning bitcoin itself. The latest of these was a paper by the UK government on the ‘Digital Pound’, predicting that it will be launched within a decade, with the deputy governor of the Bank of England commenting that a UK CBDC would "open up a new frontier in how money is used".

If CBDCs do take off then they will have a significant impact on how society and businesses operate, including insurance. So, will they be good or bad for insurance companies? And what are the risks?

What is a CBDC and why is it different from our existing currency?

Most people’s first response to the idea of CBDCs, or in the UK’s case a digital pound, is to wonder what the point is. Surely our money today is already digital, as you can pay with card, and transfer money – what’s the difference? 

The answer is that traditional currencies are mostly created and managed by commercial banks, which means that the digital part isn’t the currency itself, but the liability on the balance sheet. In other words, you don’t own your digital pounds or dollars, you have just loaned your paper money to the bank which then allows you to manage that money with its digital solution. When you withdraw your money from the bank it transforms into paper notes and coins.

Bitcoin and the proposed CBDCs are different because you no longer need the bank to hold them. Instead, you can take custody of your digital currency without bank involvement, and you can move it from one person to another without a bank being part of the transactions.

Faster, more efficient banking – and insurance 

Hence one of the potential advantages of CBDCs is that they take the monopoly of money creation and money transfers away from the banking sector, opening the way for innovation. Anyone in their bedroom could potentially start building a bank or ‘banking-like’ application on top of the CBDC. This is already happening with bitcoin and other cryptocurrencies, so the same logic should apply. This openness will create the innovation super cycle in payments and money.

Furthermore, as truly digital currencies, CBDCs would be programmable to act in the way that we need them to in any given situation. In the case of insurance, CBDCs would supercharge process automation, making it possible for an insurance premium payment to be programmed to reconcile automatically against the right invoice, and then automatically distributed from the insurance broker premium account, so that 10% goes to one insurer, 70% to another, and 20% to the broker's main account as commission income.

Like crypto, CBDCs would also travel around the globe at the speed of light, streamlining the process of selling insurance internationally, and making it easier to build a global insurance business. The possibilities are already there with bitcoin. You can send any amount of money in bitcoin on the Lightning network, and it will arrive within a few seconds. With current systems it takes anything from a few hours to a few days on the Swift network, slowing the pace of business. 

In this CBDC future, insurance reporting as we know it would also be a thing of the past, because money and reports would effectively be the same thing. If CBDCs are to work in the same way as other cryptocurrencies (which isn’t a given), then each customer or each account would have its own wallet on the ledger of the insurer. Money would be programmed to move between wallets based on certain conditions and the transactions would be recorded on blockchain, rather than in the ledger of banks. No more reconciling figures, or retrospective reports. 

What are the threats of CBDCs?

It all sounds positive, but we must be wary. Unlike bitcoin, CBDCs aren’t decentralised, and could therefore give central banks and by extension governments unprecedented access to the financial affairs of individuals and companies. How much so obviously depends on how CBDCs are built but there is the potential for a loss of privacy and an increase in control. 

For example, governments could program money to be used in a certain way, for example on certain products, or even give money an expiry date to motivate individuals to spend it to boost economic growth. It could even be possible for certain people to have their spending controlled, if their social score dropped below a certain level, for example. Of course, if we have good governments then none of these eventualities will come to pass. However, history shows us that we can’t rely on that always being the case, so these are genuine concerns. 

For insurance, it is also worth bearing in mind that CBDCs are part of a macro trends towards the greater centralisation of money, which could have a knock-on effect on the sector in the future. If insurance follows this same trend, then more centralisation and regulation could work counter to innovation by placing more power back in the hands of big insurers, hence making it more difficult for new players to enter the market.

CBDCs – or bitcoin? 

CBDCs are still hypothetical, but the way the world is going, it seems likely that digital currencies will become mainstream eventually, whether in the form of CBDCs, bitcoin, or some other form entirely.  Everything CBDCs can do, bitcoin can already do – arguably better. However, as they don’t have government support, they still attract suspicion for some and are out of bounds for insurance companies. 

So, on the positive side, CBDCs could enable more people and companies to learn how digital currencies work and give cryptocurrency the government approval that would enable conservative institutions like insurers to explore the possibilities – and potentially make huge stride forwards in innovation. Although, at present there are questions to ask about the technical realities of CBDCs and, with numerous very serious potential risks to address, there would need to be strict safeguards in place to ensure CBDCs don’t do more harm than good.

About the author

Risto Rossar is Founder and CEO at Insly. He is an insurance innovator and investor who has been in the insurance industry for 20 years and has founded five insurtech startups – including IIZI, believed to be the first digital insurance broker in world; and Insly, which builds no-code software for insurance businesses.