Article

Blockchain ecosystem: the next technology revolution?

October 25, 2017
by Neeraj Sahni, Senior Vice President FINEX Senior Broker, Cyber &Technology E&O

Innovation is the key to staying competitive in all industries. Just as we saw with the internet revolution, blockchain may be the next such revolution that could dramatically change how business is conducted daily and consequently the role of cyber insurance.

Currently most consumer transactions are processed by a particular business or via a third party service provider. A decentralized platform like blockchain would improve efficiency exponentially. Having a decentralized ledger where each transaction is encrypted and trusted without any possibility of non-repudiation makes the production of most verification documents unnecessary and creates economies of scale. Investment in blockchain technology should be a capital allocation consideration for organizations across a wide spectrum of industries as it not only creates economies of scale, but may potentially reduce the likelihood of publically exposing client confidential or personal information if implemented properly.

Although this new platform sounds great from both a consumer and corporate standpoint, relying on a public blockchain to conduct critical business transactions creates many uncertainties, most significantly security. In contrast, private transactions are processed with a permissioned group of known participants with the use of a private blockchain platform.

From an enterprise standpoint, sound security involves three main pillars – confidentiality, integrity and availability of data. Confidentiality revolves around the ‘least privilege’ principle which stands for the idea that access to information should only be granted on a need to know basis, determined by proper data classification. Integrity ensures information is not tampered with when data is in motion, i.e. internet traffic or when data is stored at rest, i.e. data on a hard disk. If the wrong person receives encrypted data, it has no value until they have a key to decrypt the data in hash format. Availability ensures information is accessible at all times from multiple data centers acting in tandem and at automatic failover facilities, regardless of the reason or size of interruption. Most enterprises strive to achieve all three pillars by taking a layered or holistic approach to enterprise security, which entails using multiple vendors who specialize in their respective security offering.

As illustrated by the large data breaches over the past few years, however, even a layered security model is not immune from a security breach essentially due to the centralization of most companies’ crown jewels.

Understanding Blockchain Technology

So, what is blockchain? A block could represent transactions and data of many types – currency, digital rights, intellectual property, identity, or property titles, to name a few. When these transactions are recorded chronologically, forming an immutable chain, it’s called a blockchain.

So, what is blockchain? A block could represent transactions and data of many types – currency, digital rights, intellectual property, identity, or property titles, to name a few. When these transactions are recorded chronologically, forming an immutable chain, it’s called a blockchain. Distributed ledgers across various networks contain different attributes of these transactions secured with cryptography and linkage providing an audit trail. A blockchain removes the need for traditional trusted connections or nodes with peers for transactions, as every node that participates in a network can provide the true state of the ledger and transact at a low cost. Bitcoin is the most common example of a cryptocurrency that relies on a public blockchain to record transactions. Since it is public, any node on a network can read or write transactions, provided they demonstrate their effort by solving a difficult cryptographic puzzle. Decentralization with no central point of failure and freedom of access anywhere is attractive, but creates challenges as ownership is unknown.

Per our understanding of security, there is availability and integrity within public blockchain, but confidentiality is not at the same level as traditional trusted nodes. These challenges have led to increased interest in private block chains for greater degree of control and for full regulatory transparency.

Looking at various industry sectors, financial institutions have shown interest in private blockchain as it gives them control over who can read or submit transactions to the verified ledger. However, the value proposition only comes when this ledger allows simultaneous trust to other financial institutions. Security and scalability remain a challenge in developing tamper-proof distributed ledgers, within banking, trading, land title registries, etc. Listed below are a few examples of blockchain technology in action:

  • Financial Institutions would have the ability to use blockchain decentralized ledgers with other banks. 
  • Business to Business payment transaction infrastructures could be developed.
  • Micropayments could be processed without incurring intermediary payment fees from card brands.
  • Manufacturers would have the ability to use trusted supply chains with vendors providing traceability and authenticity of products during the production process.
  • Smart contract applications could be used across multiple industries, which could provide the following benefits:
    • Fraud prevention in the resale event ticket market
    • Direct distribution of digital media content from the creator to consumer.
    • Peer to Peer insurance where dynamic contracts are triggered as soon as a covered event, such as a flight delay or lost article, occurs.
With the advantage of big data analytics in underwriting and in compiling claims data, blockchain technology provides various benefits to the insurance industry for dynamic pricing, better claims ratios with less fraud and less overhead expense.

These blockchain-based models present a way of re-establishing direct trust between businesses and customers. Peer-to-peer insurance, as an example, uses an algorithm to pay out claims as soon as possible, when conditions in blockchain-based smart contracts are met. With the advantage of big data analytics in underwriting and in compiling claims data, blockchain technology provides various benefits to the insurance industry for dynamic pricing, better claims ratios with less fraud and less overhead expense. The efficiency gain of pricing with such technology platforms in the insurance industry would trickle down to insureds.

With respect to cyber insurance specifically, expansion of this platform would pose new challenges in terms of the dataset size for underwriting purposes and the overall claim experience for the named insured. For example, if a data breach incident occurs in a distributed platform, it would be harder for computer forensics to determine where the failure of security initially occurred and which policy to trigger. Also, regulatory investigations would be challenging for similar reasons.

As some Fortune 1000 companies are increasingly seeing the benefits of adopting blockchain technology, it seems inevitable that this ecosystem is here to stay in different forms. As businesses overcome the known challenges, the economy of scale would create benefits and opportunities for all of us.