Blockchain technologies are promising to revolutionise the world of insurance and finance. Facebook’s announcement to launch its own cryptocurrency by the name of Libra will only add fuel to the fire. At the same time, there are still a number of practical questions on how to apply the new technology to current business issues, which will need to be solved along the way.
So, it was at an opportune moment that our Germany News Correspondent Uli Kleber got the possibility to connect with Prof. Dr. Philipp Sandner. Professor Sandner founded the Frankfurt School Blockchain Center at Frankfurt School of Finance and Management in 2015 and is one of the foremost experts on blockchain technologies and their application.
Professor Sandner, to get started, could you please share your definition of the blockchain with us?
Well, there are of course multiple perspectives to the subject. Looking at it from a business angle, the blockchain, at its core, is a technology to maintain registers, which can be used to assign digital properties to owners.
So, if you, for example, store Euros on the blockchain, you can use them to organise who owns what. Then, you can add security and organise ownership. That could be towards stocks or identities or in the case of insurance towards claims.
Understanding the register technology is key for understanding the blockchain and its applications!
Now, if you add a programming language for business logic, you can start to execute smart contracts. If furthermore, you add currency values, you will be able to program money flows and business flows. In that sense, the blockchain technology allows us to make money programmable.
You are a Professor at the Frankfurt School of Finance and Management. Furthermore, you are a member of the German government’s FinTech Council. You are consulting companies and the European Union. Also, you have been ranked by the German Capital-magazine on their prestigious ’40 under 40′ list.
Do you still have time in your life to do something outside of thinking about blockchain?
[Laughs]. Yes, it is true. I do think a lot about the blockchain. Actually, it is on my mind 24/7. But you see, you need to invest time to make a change. To me, the result of investing time in such an exciting topic is to be able to further advance the technology and its adoption.
For example, look at Facebook and its Libra initiative. This is a fascinating project. Of course, the topic is highly complex and there will be a lot of controversies. But imagine what it could do to improve the lives of hundreds of millions of people in the emerging economies that are currently cut off from the monetary system.
There are a lot of exciting Fintech innovations out there at the moment. Why did you decide to focus on the blockchain which some consider to have a rather obscure reputation due to its cryptocurrency roots?
I have always been fascinated by technology and started writing code at age 16. So, when I came across the blockchain in 2013, I became curious and started researching the technology more thoroughly. Then, in 2014, I became really interested and dug ever more deeply into the subject. When we saw that this was developing into something bigger, we decided to found the Blockchain Center at the Frankfurt School of Finance and Management in 2015.
Interestingly enough, in 2014 nobody wanted to hear about the subject. I remember talking to friends and colleagues who all rejected the concept as being just a short-lived fad. I feel that this is a typical example of history repeating itself. In Europe and especially in Germany we are quite risk-averse and quick to dismiss new technologies and ideas. We will see the same happening to Facebook’s Libra project. But we need to embrace new technologies to stay ahead!
What do you see as the main potential applications for blockchain in the insurance industry?
There are numerous applications for the insurance industry. In general, it will help to increase automation and reduce costs as smart contracts are able to execute automatically. This means that transactions will be much more efficient and need fewer manual interventions.
The interesting part about this is that it will not only drive down cost ratios – i.e. do more of the same for less money – but the technology also has the potential to open up new markets.
Think for example of the machine economy: all the sensors, devices, the whole Internet of Things, which could so far not be insured because of the transaction costs. What used to be uninsurable, for example individual sensors and machines, could now become a huge market due to the execution of smart contracts.
Furthermore, people in emerging countries could actually benefit from the use of blockchain in two different ways: Firstly, of course, if we are talking microtransactions, we also have to think of microinsurance. This topic has been receiving quite a bit of attention by insurers in the last years and access will be increased even more by driving down transaction costs through the use of the blockchain. Secondly, smart contracts and the automatic execution of transactions will provide an alternative for people that live in countries with unstable legal systems. Where before you had an issue to enforce a contract before, you will now have the security that your claim will be reimbursed automatically based on certain previously defined parameters.
With all the benefits that the blockchain offers. Why does it still seem so difficult to find practical implementations in the insurance industry?
The challenge is the same everywhere: The technology is still young and therefore not easy to implement. I think for insurers one of the biggest obstacles is still that the Euro is not yet on the blockchain. A pure connection to cryptocurrencies is not enough for a widespread adoption.
Also, I see that the understanding of the technology is still missing. The entire economy is still underestimating the potential. It is interesting to see how it is again the technology companies that are pushing the adoption. Facebook’s initiative will give the field a tremendous boost and speed up the adoption.
Look at Apple Pay which was introduced in December 2018. For years people have been arguing that Germans rely too much on physical currencies and that the use of mobile payments should be promoted. When I stopped at the gas station today and talked to the clerk, he told me that more and more people are now using Apple Pay to pay for their gas bill. The GAFAs are just so much better at pushing adoption rates than non-tech companies. This requires that sometimes companies look beyond the immediate business case return and, instead, take a view at the long-term potential of the technology. This pure short-term business case mindset and lack of technological understanding among senior management is, to me, one of the largest roadblocks to adoption.
Generali Employee Benefits has recently implemented a blockchain solution to streamline its employee benefits captive business. Axa has implemented a flight delay insurance for consumers. Where do you see more potential for the blockchain in future, in B2B- or B2C-solutions?
Yes, you are mentioning two nice early use case examples. But the true value of the blockchain will only come as soon as the Euro is on the blockchain. Then, if you take a cynic approach, the future of insurance will be defined by ‘Artificial Intelligence plus Blockchain’. The AI will take over the business logic and the blockchain will provide the infrastructure to execute the transaction.
Coming back to your question, in my opinion, both the B2B- and the B2C-area will benefit, the commoditised retail lines like car insurance maybe a bit more.
In your view, how long will it still take until we see the Euro on the blockchain, through what are currently being termed ‘stable coins’ for example?
A number of startups are already working on this. This is mostly a question of time and budget. I expect to see the first solutions by the end of this year.
How important is legislation in your view for the adoption of blockchain technologies?
Yes, legislation is very important. I still see some questions around privacy and security that need to be solved. At the same time, I feel that Europe and especially the German-speaking countries have done a pretty good job in this regard. Legislation is in place and also the infrastructure for startups has been created. So, apart from the Baltic countries, which are also quite strong, I see us well-positioned from a legislative point of view.
If you were the mayor of Frankfurt, what would be the top three measures you would implement to enable more widespread adoption of blockchain technologies? Or would you rather need to be the President of the EU commission to have an impact?
I think that the government should not run companies or blockchains. Private companies are much better at that. Instead, they should set the playground and rules. So, I would make sure to support startups and foster the creation of communities. Also, I would focus on trends. The most important technology trends for me are blockchain, artificial intelligence and data analytics. But these are nothing without looking at climate change and sustainability at the same time. In Frankfurt, you see a whole green finance cluster. This has become a movement that ties in quite nicely with the developments around blockchain.
On the one hand because one of the issues of the blockchain technology so far is the high energy consumption, which need to be reduced. However, it is important to understand that not all blockchains consume as much energy as the Bitcoin – this depends on the consensus mechanism that is deployed.
One the other hand, blockchain and cryptocurrencies hold the potential to bring sustainable growth to new parts of the population that have been barred from access to insurance and the monetary system so far. These two aspects need to be part of the development to really bring benefits to larger parts of the world.
Finally, we need to further support girls in embracing technology. 95% of blockchain startups are male-dominated. To me, this is still rooted in our educational system which needs to improve in encouraging girls‘ interest in the MINT-subjects.
What about companies, what do they need to do to unlock the potential of the blockchain?
Companies also need to invest their resources in technology, particularly AI, data analytics, blockchain and IoT. And you have to do it yourself, not let others do it for you. Although, one option is to invest in startups because this is where the innovation is. Whatever strategy a company pursues, building knowledge is important, because otherwise they are not able to recognise trends early enough and act accordingly.
It is clear to me that the time to complain is over, we now need to act and put the technology to practical use.