EIOPA Seeks Feedback on Approach to Blockchain and Smart Contracts
EIOPA published a discussion paper on uses cases of, and the European approach to, blockchain and smart contracts in the insurance sector. EIOPA seeks stakeholder feedback, by July 29, 2021, to all parts of the discussion paper, covering blockchain, smart contracts, and crypto assets use cases in insurance, related risks and benefits, regulatory barriers, and a possible European approach to blockchain and smart contracts in insurance. The paper also offers an overview of findings of the feedback received from national competent authorities, through the survey on blockchain and smart contracts in insurance in the second quarter of 2020. EIOPA will assess the feedback received to better understand and address blockchain-related challenges and developments in the insurance sector.
In the discussion paper, EIOPA notes that blockchain could provide opportunities for both prudential and conduct supervisors (suptech) as well as facilitate regtech solutions. The combination of smart contracts and blockchain could help to automate regulatory reporting and make it more efficient and transparent, improve consistency and data quality across firms, and allow regulators to get data on new areas of interest or to gain real-time access to signed contracts and the information they contain (real-time regulatory monitoring). As blockchain technology is still evolving, several challenges are emerging, such as the complexity of the technology, data protection and privacy, cyber risk, integration with legacy infrastructures, or interoperability and standardization between different blockchains.
The paper notes that potential risks posed by blockchain also include lack of knowledge on blockchain as well as governance challenges, especially due to potentially high dependency on external platforms and IT suppliers. In addition, insurance undertakings could face compliance risks, namely with the prudent person principle included under Article 132 Solvency II, since it can be challenging for insurance undertakings to properly identify, measure, manage, and control the risks of several types of crypto assets. Additionally, the accounting treatment of different types of crypto assets may require further clarification, considering that diverse accounting practices could give rise to different capital requirements under Solvency II. Based on blockchain types and platforms chosen, performance scalability challenges could arise as well. Concerns about the legal status of smart contracts also have been aired.
Although the current regulatory and supervisory framework can be considered mostly effective to address emerging risks, specific issues should be considered, based on the evolution of the technology and its uses in business processes. It is also important to ensure appropriate understanding by insurance undertakings and supervisors as well as proportionate governance policies and processes, to guarantee that all relevant risks are identified and properly managed. Given the wide range of applications and the early stage of adoption of blockchain in the insurance industry, most jurisdictions are still exploring policy and supervisory responses. This can cause legal uncertainty and act as barrier to the use of blockchain and smart contracts in insurance and could also lead to divergent regulatory and supervisory practices and different levels of consumer protection across EU. Hence, a general European harmonized approach to blockchain could promote and facilitate the sound scaling of blockchain and smart contracts, including in the insurance context.
To this end, EIOPA will assess the feedback to this discussion paper to better understand blockchain developments in the insurance sector as well as the risks and benefits related to them. This could also help to provide informed input for the upcoming legislative initiatives foreseen in the EC Digital Finance Strategy. It could also supplement the overall work of EIOPA on digitalization, including in areas such as insurance and reinsurance value chain and new business models arising from digitalization, insurance platforms, and ecosystems, open insurance, digital ethics, and regtech/suptech.
Related Links
Comment Due Date: July 29, 2021
Keywords: Europe, EU, Insurance, Blockchain, Suptech, Regtech, KYC, Artificial Intelligence, Smart Contracts, Crypto Assets, Solvency II, Regulatory Capital, EIOPA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Trevor Howes
IFRS 17 technical advisor; AXIS actuarial modeling system expert; extensive experience in life insurance and life reinsurance, with focus on modeling, valuation, and financial reporting
Related Articles
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
FCA Sets up ESG Committee, Imposes Penalties, and Issues Other Updates
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
FSB Reports Assess NBFI Sector and Progress on LIBOR Transition
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.
