21 September 2022

InsurTech and the Cutting Edge of Blockchains: Identity Tokens and Insurance

Insurance industry leaders by now have become more familiar with a variety of potential use-cases for blockchain technology in insurance, such as the implementation of "smart contracts" to promote efficiency and security in the processing of claims. A "blockchain," in general terms, is an immutable distributed ledger capable of tracing transactions. A "token" is a crypto asset that resides on a blockchain. There is a wide variety of tokens in existence, from decentralized finance (DeFi) tokens to Non-Fungible Tokens (NFTs) that have made headlines in recent months. In this article, we examine how the emergence of "identity tokens" could impact the insurance industry.


The Emergence of "Identity Tokens"

The initial and, to date, most widely adopted use-cases for blockchains have been financial. Whether through the creation of decentralized currencies, like bitcoin and ether, or the development of DeFi protocols, like decentralized lending platforms or stablecoins, blockchains have been focused almost exclusively on money. Recently, however, on-chain assets have emerged that can be broadly classified as "identity tokens" – that is, tokens that denote a user's experiences, credentials, commitments, relationships, and other social identifiers. While the structure and the use of identity tokens is in its nascent stages, we suggest a few ways in which identity tokens may influence the insurance industry, both in its traditional form and as the industry may exist natively in an on-chain economy.

Identity tokens are issued on a blockchain just as any cryptocurrency coin or token would be. Unlike cryptocurrency tokens, however, identity tokens have either limited or no fungibility. Additionally, identity tokens may be either transferable, like cryptocurrency tokens, or non-transferable. For example, both proof-of-attendance-protocol (POAP) tokens and "soulbound" tokens (SBTs) are identity tokens, even though they have different properties. POAP tokens – which may be issued, for example, to attendees of a particular conference – have limited fungibility and are transferable from one user to another (even a user who did not attend the conference). In contrast, SBTs – which may evidence, for example, a user's completion of a university program or repayment of a particular debt – are non-transferable and non-fungible. Regardless of the form they take, identity tokens can denote users' credentials and potentially even users' reputation, credibility and social standing on-chain. As such, identity tokens may be used as a substitute for traditional, off-chain identity markers or as a way represent, and distinguish among, particular individuals on-chain.  

Potential application of identity tokens to traditional insurance markets

The potential impact of identity tokens on crypto-insurance markets