In our first part of our series opening up the black box of digital asset insurance, Ben, Dan and Harry Donnelly, founder of Circuit, explore the history and evolution of digital asset insurance. 

## Introduction

The digital asset market is surging. BlackRock's spot Bitcoin ETF recently recorded $5 billion in volume in one day. Fidelity, Franklin Templeton, Invesco, and State Street are diving in. JPMorgan is tokenizing money market funds, while KKR and Apollo are putting real-world assets on chain.

But there's a hidden problem that isn’t often talked about: Only 1-3% of digital assets are insured.

This matters because insurance isn't optional for institutions. It's a core part of risk management - required by regulators, boards, and basic business prudence. Without comprehensive coverage, many institutions simply won’t be able to enter the market, regardless of opportunity. 

But it goes even further. There is no mature market in the world that became that way without a liquid insurance market. Insurance helps people ship goods, sell services, fly planes and construct buildings. It’s a key part of any economy to allow companies to do business, providing important risk transfer to help the world function. Yet nearly 16 years on, crypto still remains the most excluded asset class in the world, stunting growth and leaving entrepreneurs self-insuring their risk more often than not. 

This means getting digital asset insurance right is hard. Traditional insurers struggle with novel technical risks. Crypto-native solutions to date have lacked capacity and aren’t regulated. And unfortunately, even when coverage exists, it often has critical gaps.

Take 2023’s $1.7B in crypto hacks1. Most victims had zero coverage. Those with insurance often discovered - too late - that their policy didn't cover the actual attack vector used. Like a homeowner discovering their policy doesn't cover floods only after the storm hits, crypto companies keep finding holes in their coverage the hard way.

The bigger problem? Digital asset insurance is a black box. There's no comprehensive resource explaining what coverage is available, what it actually protects against, how to get it or what it costs. Every week we speak with industry leaders facing the same challenge: they know they need insurance, but can't find clear information about their options. Ask five different brokers and you'll get five different answers about what's possible.

This piece is Part 1 of our guide to digital asset insurance. We'll explore:

- How the industry evolved from both traditional specie insurance and cyberinsurance
- The history of the digital asset insurance market

By the end, you'll understand the critical intersection of traditional insurance and cyber insurance that makes digital asset coverage unique. You'll know what questions to ask about different coverage types. And you'll have a clear map of who can actually help protect your assets.

Let's dive in.

## How Insurance evolved

Digital asset insurance emerged from a unique intersection: centuries-old traditional  insurance colliding with modern cyber coverage. Understanding today's landscape requires understanding both parents.

### Insurance evolution

__Origins__

Insurance began with merchants protecting trade. The first risk-sharing agreements were born in Ancient Babylon - if one trader's shipment was lost, the group would help cover the loss. Medieval Italian merchants formalized this further, creating contracts to spread the risk of maritime ventures across multiple investors.

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Contemporary Illustration of Lloyd’s Coffee House

Modern insurance took shape in London's coffeehouses. In [1688](https://misscoffeebreak.wordpress.com/2014/02/16/the-story-of-edward-lloyd/), Edward Lloyd's coffeehouse became the meeting point where merchants and shipowners connected with wealthy individuals willing to take on a portion of their risk. The principle was simple: instead of one person bearing the full risk of a voyage, many people would each take a small share. This coffee house evolved into Lloyd's of London - still one of the world's largest insurance markets and a key player in digital asset insurance today.

__Global Growth__

In the 1800s, the world grew increasingly connected. Steamships began crisscrossing the globe, trade expanded, and banks grew larger to finance it all. These growing financial institutions needed specialized coverage to match their scale and complexity. This gave rise to specie insurance - originally meant for "money in specie" (physical coins), but eventually expanding to cover all kinds of valuable physical assets. Today, specie insurance protects everything from gold bullion to fine art, anywhere these assets are stored or moved. This broad coverage of physical valuables is particularly relevant for digital asset custody, where cold storage still means protecting physical devices.

__Modern Times__

By the 1960s, financial institutions had developed sophisticated coverage frameworks, many of which still form the backbone of asset protection today.

These frameworks started with custody chains. Every asset needed clear documentation of who controlled it, when, and where responsibility transferred. Like passing a baton in a relay race, each handoff had to be precise and recorded. This created a clear trail of liability - critical for when things went wrong.

Physical security evolved from simple locked doors to comprehensive systems. Banks developed detailed standards for everything from vault construction to guard protocols. More importantly, they created systematic ways to verify these standards were being followed through regular audits and inspections. Claims processes became equally systematic. When losses occurred, institutions knew exactly what to do - from initial incident reports to final settlement.

Regulators codified much of this into requirements. They set minimum coverage levels, spelled out reporting requirements, and specified what types of coverage different activities needed. This standardization helped the industry scale - insurers knew exactly what they were covering, and institutions knew exactly what protection they had. Because of this clarity, insurers were able to cover larger limits at cheaper prices. Specie insurers can cover limits in the $50m+ range and form consortia to insure losses in the hundreds of millions, if not billions.

These frameworks were so effective at protecting physical assets that they're still largely in use. They're also why traditional insurers initially approached digital assets through a physical security lens - focusing first on cold storage coverage using existing specie frameworks. But as digital assets have evolved, protecting physical vaults isn’t enough. Securing purely digital value would require an entirely new kind of insurance - one that was evolving alongside the rise of computers.

## Cyber Insurance Evolution

While financial insurance evolved over centuries, cyber insurance has evolved in a flash over the last few decades. As computers transformed from novelties to critical infrastructure, entirely new risks emerged - risks that traditional insurance never contemplated. As businesses went online, criminals didn't need guns or vault-cracking skills - just a keyboard and an internet connection.

Cyber insurance emerged in the late 1990s as businesses grappled with emerging risks from digital transformation. The coverage initially evolved from professional liability and errors & omissions policies, primarily serving technology firms that provided infrastructure and personal computing solutions to businesses.

As the internet transformed commerce during the dot-com boom, cyber insurance shifted its focus toward media liability coverage, particularly addressing concerns about intellectual property infringement through multimedia content on websites. This was driven by fears that unauthorised use of images and content could lead to expensive lawsuits, amplified by the unprecedented global reach of the internet.

Some early policies also addressed speculative risks that proved less impactful than feared, such as the Y2K bug, which helped shape underwriters' understanding of how to assess and price digital risks.

Open access to the internet changed everything, creating entirely new challenges for innovative insurers. Pioneers were building entire businesses online. Software started eating the world, and a single hack could now destroy a multi-national empire..

To address these evolving threats, insurers had to rethink their approach:

- Technical security audits replaced physical inspections
- Network monitoring became as important as guard patrols
- Digital forensics became critical for claims
- Policy wordings had to be invented to address the new nature of how companies could now suffer losses. New terminology was created and a standard underwriting framework started being developed.

By 2010, cyber insurance was its own distinct market. The scale and sophistication of attacks exploded. A single breach could now cost hundreds of millions. Insurers had to adapt again, focusing more on prevention and incident response. Those that didn’t had to either close their doors, lay-off their cyber teams or restructure their book to try to regain profitability.

During the 2010s, numerous insurers tried their luck at underwriting cyber in a profitable way.. Companies like CFC Underwriting which started out as a cyber insurance player has one of the largest teams of cyber underwriters in the world, some 20 years from when they first started. Unfortunately, this wasn’t the case with all insurers, with some large names having to shut down their books entirely because of the increase in ransomware claims and the interconnected nature of cyber business interruption with managed service providers.

When COVID hit, everything accelerated. As the world shifted online practically overnight, attack surfaces exploded. Companies that had never worried about cyber risk suddenly found their entire business operating remotely. This forced digitization drove unprecedented demand for cyber insurance. Premiums soared and the market matured rapidly.

The impact was dramatic. In just a few decades, cyber insurance had grown from a niche offering to a $14 billion market, expected to reach $29 billion by 20273. While traditional insurance took centuries to mature, cyber insurance had to evolve at the speed of technology - creating crucial foundations for what was coming next: digital assets.

## Digital Asset Insurance

The story of digital asset insurance mirrors crypto itself: from stigma to institutional adoption.

__Early Days__

In crypto's early days, most insurers wouldn't touch it. The market was retail-focused, and Bitcoin was widely seen as a tool for illicit activity. Few legitimate businesses needed coverage, and fewer insurers were willing to provide it.

__First Steps__

Miners were among the first to need coverage. Companies like Marathon and Riot were running hundreds of millions in equipment, facing tangible risks like equipment damage and power failures. Insurers could understand these exposures - they looked similar to other industrial operations.

__The Custody Evolution__

Then came digital asset custodians. These looked more like traditional financial institutions, with similar security needs and business models. Insurers found their comfort zone: treat a hardware wallet like a gold bar in a vault, and suddenly digital asset custody became insurable using traditional specie coverage frameworks.

However, looking at custody this way works for offline storage of digital assets, but what about assets locked in smart contracts? Well the traditional insurance market still doesn’t have a good response to this. To solve it, the crypto community created its own way of insuring itself.

__Discretionary Cover aka Decentralized (or DeFi) Insurance__

DeFi insurance is a decentralized alternative to traditional insurance that operates on blockchain networks, primarily designed to protect users against risks specific to decentralized finance protocols. It allows users to purchase coverage against various crypto-related risks such as smart contract failures, exchange hacks, or stablecoin depegging events. 

When users buy DeFi insurance, they pay premiums in cryptocurrency or stablecoins, and if a covered event occurs (like a protocol hack), they can submit a claim that's typically assessed by a community of token holders rather than a traditional insurance company. The entire process — from purchasing coverage to filing claims and receiving payouts — is automated through smart contracts, making it transparent and largely eliminating the need for traditional intermediaries.


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Nexus Mutual overview 

Although it’s called DeFi insurance, it actually isn’t ‘insurance’ as insurance can only be provided by a regulated insurance company. DeFi insurance should go by the phrase ‘discretionary cover’ and just like how insurance started out by having many individuals pooling their money together to protect against risks, discretionary cover is bringing it back. From hereon out, we’ll refer to DeFi insurance by its correct terminology - discretionary cover.

In a very poetic way, blockchain technology is breaking new ground by rewinding the clock and returning to the roots of insurance. So, how should you think about when to use discretionary cover or traditional insurance? We’ve created a handy [table](https://drive.google.com/file/d/1XuKxLCX1JXpwIR2vi2ark5KInnu3y9hy/view?usp=drive_link "Traditional insurance vs Discretionary cover ") to help.

Insurance companies and discretionary cover have different strengths and can co-exist side by side providing complementary coverage. It’s essential to understand the strengths of each in order to navigate the different risk transfer mechanisms at your disposal.

__New Frontiers, New Challenges__

Even with the advent of discretionary cover, today's digital asset landscape creates unique challenges. Unlike traditional cyber assets, crypto is a bearer instrument - possession equals ownership. A single breach can mean permanently lost assets. The 2022 Ronin bridge hack showed how devastating this can be - $620M gone in minutes, with virtually no chance of recovery.

The risks are also more complex:

- Smart contracts with open, exploitable code
- Hot wallets connected to the internet
- Cross-chain bridges creating new vulnerabilities
- DeFi protocols with interconnected risks

Like the risk and fall of cyber insurers, discretionary cover protocols have also gone bust. During the Terra Luna incident, several protocols were providing coverage for algorithmic stablecoin fluctuations. Once USDT lost it’s peg, the protocols effectively got liquidated. It’s not just traditional insurance that struggles with predicting new exposures and loss trends!

__Current State and Future__

Today, capacity remains limited outside traditional custody and mining. A typical specie policy might offer $250M in cold storage coverage with coverage that can go up to $1bn, but hot wallet limits rarely exceed $100M - a huge gap for institutions managing billions in assets. Smart contract coverage is even scarcer.

But change is coming. Major regulators are mandating coverage - Singapore requires digital asset firms to maintain specific coverage levels and Hong Kong's licensing regime includes mandatory insurance requirements. Major insurers are taking notice - Munich Re has been expanding their digital asset team.

2025 looks set to be a breakthrough year. As institutional capital flows in and regulatory requirements firm up, insurers will have to adapt. The question isn't if digital asset insurance will scale, but how quickly.

__Looking Ahead__

Understanding this history will help in navigating today's digital asset insurance landscape. 

In Part 2, we'll examine the current market landscape: what coverage exists, who provides it, and how to think about protecting your digital assets. We'll map out the key players and break down the actual coverage types available today.

Subscribe below for direct access to the next parts in this series, where we'll help you navigate the complex world of digital asset insurance. 

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Digital-Assets-Insurance-History-v2

Digital Asset Insurance History

2024 turned out to be a pivotal year for the broad blockchain technology industry, with stablecoins emerging as an innovation with concrete real-world utility. With a market cap hovering around $200bn and monthly volumes in the trillions, Stablecoins represent perhaps the first blockchain technology positioned to impact everyday consumers' lives through improved global payments infrastructure. 

However, this mainstream potential brings familiar risks. 

The creation of the UK's Financial Services Compensation Scheme (FSCS) in 2001 represented the culmination of decades of evolving consumer protections, replacing a patchwork of independent compensation schemes that had previously safeguarded depositors from institutional failures. 

As stablecoins move toward widespread adoption without equivalent compensation schemes in place, there's a growing risk that consumers could be left exposed to the very types of losses that traditional financial services have spent decades learning to protect against.

## How did we get here?

A clear pattern of convergence had already been emerging across jurisdictions prior to the announcement in the UK. Consultation and discussion papers from the UK's Financial Conduct Authority (FCA), Abu Dhabi Global Markets (ADGM), Singapore's Monetary Authority (MAS), and Switzerland's FINMA demonstrate remarkable alignment on key regulatory principles across jurisdictions.

These frameworks universally emphasise full reserve backing, segregation of assets, regular independent attestation, and robust redemption rights. They also share common ground on operational resilience, risk management, and corporate governance requirements. This regulatory convergence suggests a growing consensus on how to manage the risks associated with stablecoins while fostering innovation.

## Are these recommendations comprehensive enough?

In short, no. There is a notable gap across these published frameworks: the absence of consumer compensation schemes.

This stands in stark contrast to traditional financial services, where deposit insurance and investor compensation schemes are the cornerstone consumer protections. In the UK, for example, the Financial Services Compensation Scheme (FSCS) protects bank deposits up to £85,000, providing crucial security for consumers if their bank fails.
Right now, none of the emerging stablecoin frameworks propose equivalent protection. In a 2023 discussion paper, the FCA explicitly states it won't propose to extend FSCS coverage to stablecoin activities. Whether this stance remains in the next iteration of regulatory discussion, remains to be seen. 

Other regulators remain silent on the issue. Instead, these frameworks rely entirely on preventative measures like reserve requirements and prudential standards to protect consumers.

## How could this shape stablecoin services?

The lack of compensation schemes creates a fundamental difference between traditional financial services and regulated stablecoin services. While a fiat banking customer knows they're protected if their institution fails, a stablecoin holder has no such guarantee. The only protection offered is indirect, where the PRA has determined that FSCS coverage might apply when a bank leveraging  fiat-backed stablecoins to offer payments services fails, but not if the stablecoin issuer itself fails [(source: FCA Discussion Paper, DP23/4, 2023)](https://www.fca.org.uk/publications/discussion-papers/dp23-4-regulating-cryptoassets-phase-1-stablecoins)

In reality, the best stablecoin projects should be backed 1:1, but guidance or regulation to ensure this is not yet present in the UK. If an issuer does fail, the hope would be that firms maintain full capitalisation of issued stablecoins and would be able to redeem against them.

Unfortunately, this isn’t always the case with some projects holding illiquid financial instruments that cannot be disposed of quickly in the event of a collapse, leaving customers exposed to financial losses. A lack of transparency and global standards around how popular tier-1 stablecoins are backed has come under scrutiny in recent years (see: [Tether and the issues around independent audits](https://www.blockhead.co/2024/10/28/tether-confirms-btc-reserves-but-is-usdt-still-a-120b-scam-amid-us-probe/)) and there still remains a protection gap for customers to be fully covered should a firm fail.

For stablecoin service providers and the broader industry, this regulatory gap presents both challenges and opportunities. While robust preventative measures are crucial, the lack of compensation schemes could impact consumer confidence and institutional adoption. As regulatory frameworks evolve, the industry might need to consider alternatives to traditional deposit insurance, perhaps leveraging the onchain technology that makes stablecoins possible.

The emergence of aligned regulatory frameworks is a positive development for the industry, providing clarity and consistency across major jurisdictions. However, the compensation gap remains a significant differentiator between traditional and digital finance – one that the industry will need to address as stablecoins move toward mainstream adoption.

Stablecoins: New innovations, familiar risks

Stablecoin

The coverage, delivered in partnership with Native and Team Rizzo, sets a new benchmark for smart contract protection by introducing a $25 million limit and will be available to Rizzo Validator Delegates.

The new solution has been developed by Native, a London-based digital asset insurance broker. Having launched last year with the backing of Nexus Mutual, the world’s largest decentralised insurance alternative, Native is the first digital assets insurance broker to bridge regulated insurance with on-chain coverage.

Bittensor nominators staking within the Rizzo Validator can benefit from comprehensive coverage against staking smart contract hacks, including code bugs and exploits used in malicious attacks where bad actors steal or take control of users staked TAO. Delegates staking TAO to the Rizzo Validator will be able to access this protection through Native’s syndicate on Nexus Mutual’s proven smart contract infrastructure. In order to gain access to this policy, they must simply register their wallet on the Rizzo.Network website.


Bittensor receives On-Chain Coverage to Protect Network Participants

Jake Steeves 

Frank Rizzo 

Beginning with $25 million in coverage, The Rizzo team is preparing to scale in tandem with the growth of their validator and subnets, adding further layers of protection as the cover matures. Nexus Mutual maintains a fully transparent, on-chain platform, where all coverage capacity and claims are available for public scrutiny. Nexus Mutual has a strong and longstanding history of paying claims through some of the largest events in DeFi.

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Dan Ross 

## About Bittensor

Bittensor is the world's largest decentralized, blockchain-based protocol fostering collaborative AI development. Its native token, TAO rewards contributors and powers transactions and governance. Founded in 2021 by Jacob Steeves and Ala Shaabana, Bittensor advances a trustless AI marketplace via its Yuma Consensus mechanism.

## About Rizzo Validator

Team Rizzo is a dynamic group of AI engineers and business professionals, thriving within the Bittensor Network. They operate the Rizzo Validator, ensuring seamless network performance, while simultaneously leading Subnet 20 Bitagent and Subnet 45 SWE. With their bold innovation and technical brilliance, they’re pushing the limits of decentralized AI.

Website - [Rizzo.Network](https://rizzo.network)   Twitter - [@TeamRizzoAI](https://x.com/TeamRizzoAI) 

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## Preaching to the choir
I’d be stating the obvious to tell you the future of insurance is about solving how to build businesses that can take the best of innovative technologies and combine them with the stability & trust required of the industry. 

Of all the technologies, crypto, blockchain and digital assets have had the least insurance innovation, both in how they’re served as insured businesses and how the technology they bring is applied within insurance. 

But, to me, combining insurance businesses and blockchain technologies has as much opportunity to progress the industry as automation and AI. Our dream at Native is to build a business that combines the best of all of these industries and technologies, setting a blueprint for a tech-first insurance company, one we think serves the next 100 years.

Our clear first step is in bridging worlds: bringing together the reliability of traditional insurance with the transformative potential of blockchain technology and onchain finance. As crypto is reshaping the traditional finance landscape, we’re engineering a hybrid approach to the future of insurance. 

## The state of traditional insurance and onchain insurance 

The digital asset industry faces a critical insurance gap. Traditional carriers, constrained by a lack of access to technical expertise, legacy systems and inflexible risk assessment models, struggle to provide adequate coverage or capacity. Meanwhile, pure decentralised “insurance alternatives”, while innovative, lack the regulatory framework and institutional trust necessary for the widespread adoption of these early blockchain pioneers.

Onchain insurance represents a fundamental shift in how coverage can be structured, managed, and delivered. At its core, it leverages blockchain technology to create transparent, automated, and efficient finance solutions. 

Smart contracts can enable parametric claims processing and instant premiums or claims settlements. Crypto-denominated policies align with how digital asset businesses operate. Risk pools & reserved capacity can be tokenised and managed using publicly auditable smart contract code, increasing both capacity and liquidity while enhancing transparency and trust.

This is where the real innovation begins: hybridising these powerful blockchain capabilities with traditional insurance underwriting and capacity. 

Regulated frameworks provide the security and trust that institutions demand. Risk assessment by blockchain security experts ensures sustainable underwriting through deep technical expertise. Expert claims adjusters understand the technical complexities of digital asset incidents. When merged thoughtfully, these elements create something more powerful than either approach alone. I see it as more than the sum of its parts, but currently a luxury of start-ups like ours.

## Our hybrid approach

Native brings an entirely new approach to digital asset insurance by seamlessly combining regulated insurance with onchain solutions. Rather than forcing clients to choose between traditional coverage or pure blockchain alternatives, we create bespoke solutions that leverage the strengths of both worlds.

Our hybrid model means we offer crypto-denominated limits that match how many digital asset businesses operate, while maintaining the security of regulated insurance frameworks. Smart contracts provide unprecedented transparency in policy terms and claims processing, while traditional underwriting expertise ensures sustainable risk assessment. 

For brokers, this means access to greater capacity and more flexible coverage options. For underwriters, it means better data and risk insights, enabling them to confidently enter the digital asset space. And for clients, it means finally having coverage that truly understands and adapts to their needs.

What makes this approach powerful is its adaptability. Whether working with traditional insurers looking to enter the digital asset space, or crypto-native businesses seeking institutional-grade coverage, Native's platform bridges the gap. By bringing together blockchain with traditional insurance expertise, we're laying the groundwork for a more ambitious vision. 

Our systems are built to harness AI to enhance everything from how we communicate to how we assess real-world risk. We depend on automation for seamless operations, and are architected to be quantum-ready as the technology matures. We're not just solving today's challenges – we're building the foundation for how insurance will evolve over the next 100 years.

## Singing with the choir

The insurance industry stands at a crossroads as crypto, AI and cutting-edge technologies approach their critical mass. The rapid evolution of digital assets and blockchain technology presents both unprecedented challenges and opportunities. 

The future belongs to those who reimagine what's possible by combining traditional insurance with groundbreaking technology.

Native was born out of an undying need to build that future today. We're not just bridging traditional insurance with blockchain technology - we're creating solutions that weren't possible before. We want to help create the blueprint for how insurers can truly evolve alongside innovation to meet the needs of a civilisation progressing at break-neck speeds.
The technology exists. The expertise exists. It's time to bring them together in ways that serve the best of multi-industry innovations, the inevitable Singularity and the next 100 years.


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Lloyds Subscription Room, from "Ackermann's Repository"

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