Digital Asset Firms Face Coverage Gaps in Evolving Insurance Landscape

The insurance industry is struggling to adapt to the rapid evolution of digital assets, decentralized finance (DeFi), and tokenization, leaving companies in the space vulnerable to uninsurable risks. While these technologies are increasingly mainstream—real-world asset tokenization alone is expected to hit $20 trillion in value within the decade—the coverage offered by traditional insurance remains inadequate and often ill-suited for the unique challenges of the sector [1].

Management liability insurance, a cornerstone for new and emerging industries, is particularly ill-equipped to meet the needs of digital asset firms. Directors and officers insurance, which is essential for attracting quality board members and securing investor capital, is often difficult to obtain in a form that adequately covers the specific risks associated with digital asset businesses. Traditional policies fail to address key exposures such as the theft of intellectual property, the misappropriation of tokenized assets, or the legal liabilities arising from regulatory shifts [1].

Insurers have historically been hesitant to underwrite digital asset risks, largely due to the difficulty in quantifying exposure. Many remain on the sidelines, while those who do offer coverage often provide policies riddled with exclusions and loopholes that can be used to deny claims. In practice, this means that when a digital asset firm faces legal or operational challenges—such as cyberattacks targeting digital assets or regulatory investigations—its insurance may offer little to no meaningful protection [1].

The lack of appropriate coverage is particularly concerning as companies pursue complex capital-raising mechanisms such as SPACs or IPOs, where the risks are distinct and require specific, tailored insurance solutions. Similarly, technology liability insurance that should cover intellectual property or the efficacy of novel blockchain-based systems is often absent or insufficient [1].

While some insurers are beginning to recognize the need for more adaptive policies, the capacity for digital asset-specific insurance remains significantly lower than for traditional financial institutions. Management liability coverage in the digital space is estimated to be in the hundreds of millions, compared to the billions available in the traditional finance sector [1].

Darren Sonderman and Sydney Sonderman of CAC Group emphasize that insurers must craft policies that are not only customized but also resilient to regulatory changes. They highlight the potential for regulators to become litigants, referencing the U.S. Department of Justice’s Civil Rights Fraud Initiative and past regulatory actions that have led to billion-dollar liabilities for companies following guidance from former administrations [1].

The authors note that insurance policies built with flexibility and foresight—incorporating over 30 key modifications such as removing restrictive exclusions and expanding definitions to include tokenized assets and private keys—can provide the necessary protection. These policies must evolve alongside the technology and regulatory landscape to avoid becoming obsolete at the very moment they are needed most [1].

Despite the challenges, the outlook is not entirely bleak. As disruptive technologies become mainstream, insurance capacity is expected to grow and costs to decline. For now, however, digital asset companies must navigate a landscape where insurance is often a last resort rather than a first line of defense [1].

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[1] Title: Smart contract companies, dumb insurance coverage (https://coinmarketcap.com/community/articles/68a47d58db9cb512e8f45612/)