Custodial Risk Insurance Explained

When you entrust your crypto assets to a third-party custodian—whether an exchange, wallet provider, or institutional custodian—you expose yourself to custodial risk: theft, mismanagement, or insolvency. Custodial risk insurance aims to safeguard assets in such scenarios.

What Is Custodial Risk Insurance?

This insurance covers losses resulting from events like hacking, insider theft, or system failures at custodial entities. It’s especially critical for institutional investors subject to fiduciary obligations.

Coverage Models

1. Direct Coverage

Policies issued directly to custodians, protecting their clients’ assets under management.

2. Pass-Through Coverage

Custodians include insured amounts in their client terms, extending protection indirectly.

3. Reinsurance Layers

Large custodians use multiple reinsurers to distribute risk across global underwriters.

Leading Providers

Firms like Coincover, BitGo, and Fireblocks partner with Lloyd’s of London to offer custody insurance covering up to hundreds of millions in assets. Coverage often includes hot and cold wallets, key loss, and operational errors.

Challenges

• Valuation volatility complicates policy limits.
• High premiums due to limited underwriting data.
• Exclusions around smart contract or DeFi exposure.

Best Practices

• Verify insurer credentials and policy wording.
• Understand exclusions—especially around negligence or unapproved storage methods.
• Regularly audit custodial partners.

Conclusion

Custodial risk insurance is a cornerstone for institutional crypto safety. As regulations mature and market data grows, expect more standardized, accessible, and affordable offerings.