Why Digital Asset Insurance Is Still Scarce as Hacks Grow Larger

What does Soter Insure do, and who and what do you insure?

We are an innovative insurance company licensed by the Bermuda Monetary Authority. We have an innovative insurance licence to provide essentially financial lines to financial institutions that deal in digital assets.

Your Series B investors span Standard Chartered SC Ventures, SBI Group, Coinbase Ventures and Franklin Templeton. What does this institutional mix tell you about the opportunity?

I would throw Brevan Howard Digital into that mix as well. We have been very thoughtful about the strategic investors that make up our capital stack. Institutions thinking about digital assets, and all the evolving regulatory frameworks we see globally, are thinking about what insurance solutions should look like in order to encourage broader adoption and to make sure investors have protections they would not know how to navigate themselves if they were just trying to get into blockchain and crypto.

You say protection is so scarce that banks cannot scale in digital assets without it. What is so hard to find in the insurance space?

There are some lines of capacity for loss of assets in the crypto space, but the largest lines are in specie and are essentially provided for cold storage. They address the potential physical loss of keys or hardware. The environment has changed, of course. More recently we have seen operational threats, especially with the evolution of more sophisticated technology, AI and large language models, so crime and cyber related risk has gone up exponentially, and there is not a lot of capacity there. One thing I would add is that when there is an exploit, the numbers are very large. Think of a category six hurricane. You see that with the Binance event last week, and you have to be very thoughtful about how you insure that.

What are the implications of the Binance hack, the largest on record, for the digital asset insurance industry?

It is very important. When exploits are a category six hurricane and you are providing insurance for that, it makes it very difficult to think about premiums per year and how often these ruptures seem to be happening these days. How do you price that, and are the premium pools going to be enough to cover these large losses? Looking at some of the larger events of the last couple of years, including Binance just recently and the DeFi exploits from April, you have multi billion dollar losses. The good news is that these new technology companies have been doing so well that they have been able to create self insurance pools or loss pools, like the one at Binance, to cover the losses and make sure customers are whole. But with all of traditional finance going onto blockchain rails and the tokenisation of all real world assets, at some point individual operators are not going to be able to cover the losses if they could potentially get into the trillions rather than just the billions. I know these are very large numbers, but it is concerning that individual operators have to stand up for these losses while they also try to harden their defences. We have to be thinking about ways that investors are safe.

What would you say are the main limitations of the insurance industry today?

The issue I was talking about, where the losses are very large. And some of these assets are denominated in cryptocurrencies like Bitcoin and Ethereum, so you have an asset liability mismatch, where losses go up or down depending on the price of the cryptocurrency versus the dollar. The same goes for the claims process, where you can have pretty significant gaps in asset liability matching. That is our novel approach. We are one of the unique companies that is not only denominated in fiat but also in Bitcoin and Ethereum, and we will be rolling out other products, like in the Solana ecosystem.