Sealing the Gaps in Crypto Custody Insurance

We created Anchorage to solve a single problem: helping institutional investors hold digital assets securely, without sacrificing usability. Through our team’s countless white-boarding sessions, code reviews, and trips to configure hardware security modules in far-flung data centers, it never occurred to us that we were solving an insurance problem.

Of course, we’ve always known our clients and their LPs would expect their digital asset custodian to be insured. Attackers pose a constant threat to institutional crypto holdings, as dozens of high-profile crypto heists have shown. The worst can happen, and insurance is a necessary form of protection. We assumed insurance was binary — either you’re covered or you’re not. We were wrong.

Crypto Investors Shouldn’t Have to “Mind the Gap”

Here’s the problem with crypto custody insurance: not all coverage is equal. Most custodians’ architecture uses a combination of hot wallets and cold storage, and policies may vary from one part of the architecture to another. This approach can result in coverage gaps. For example, one custodian may have crime insurance to cover only assets “in flight,” focusing on hot wallet holdings over cold storage. Another may have specie insurance that covers assets “at rest” in cold storage, but doesn’t cover third party hacks, or losses due to compromised key generation or transaction processes. In other words, when a custodian forces a trade-off between security and usability, the insurance reflects that risk variation.

With Anchorage, investors don’t face such a trade-off. Our solution is built on new technology that advances beyond cold storage to enable online participation with offline assets. As a result, we were able to work with insurers to develop an insurance policy that breaks new ground for our industry, covering digital assets under custody end-to-end throughout their entire life cycle.

A First for Crypto Custody Insurance

To understand this achievement, it’s helpful to have some context about how custodians get insurance. Because digital assets are relatively new, and digital asset custodians are even newer, custodians must seek out bespoke insurance policies. Custodians work with insurance brokers who evaluate their risk profile, craft the insurance policy, and find underwriters who will pay out in the event of a claim.

Ironically, the more innovative and unprecedented a venture is, the more the process of insuring that venture resembles the process used centuries ago. In the 1600s, wealthy individuals backing sea voyages would write their names underneath (under-write) a summary of a given voyage’s potential risks. For those on the technological frontier today, as for the voyagers of yore, underwriters must be individually sourced per policy.

The market capacity for digital asset custody insurance is limited, with likely less than $1 billion available, so all crypto custodians are in a sense competing for a finite amount of available coverage. Based on the growth rate of our assets under custody, we knew we’d need significant coverage at a price that would allow us to scale. We partnered with Aon, a professional services firm and one of the world’s largest insurance brokers, to present our solution to insurers. Together with Aon we undertook a deep actuarial analysis showing how our platform measures up. The result was clear: Anchorage is safer than cold storage.

Closing the Gaps: Anchorage’s Comprehensive Insurance Coverage

In the end, we procured a crime insurance policy that’s easier for clients to understand and offers additional peace of mind. The coverage we procured is a testament to insurers’ confidence in the security of our product.

“We are excited to partner with Anchorage, and leverage our team’s deep understanding of their custodial approach to tailor appropriately broad insurance. When a solution can be insured end-to-end, clients are ultimately less exposed.”

Jackie Quintal, Managing Director of Aon’s Financial Institute Practice

In keeping with our mission to advance institutional participation in the digital asset class, we are committed to keeping our insurance coverage simple and ensuring that clients assets are protected without compromise. We’ve been humbled by the reception from insurers, and we look forward to partnering with them to develop new insurance offerings over time.

To learn more about Anchorage, please get in touch.