What is Custody Cover?

Custody Cover, sometimes referred to as Custodian Cover, is a type of protection against fund loss resulting from the use of a centralized finance (CeFi) product, often called a custodian.

CeFi platforms, which can be cryptocurrency exchanges, cryptocurrency interest accounts, or wallets, take control of the user’s private keys: the unique cryptography that gives them access to their cryptocurrency.

Custody Cover serves to protect against losses that can result from the use of centralized cryptocurrency storage, such as hacks and paused withdrawals.

In the United States, cryptocurrency is not legal tender. For this reason, FDIC insurance, which protects all savings accounts opened with an FDIC-insured bank or credit union, by up to $250,000 per account, does not apply to custodial cryptocurrency storage.

Takeaways

• Custody Cover is a type of fund protection designed to protect against losses resulting from the use of CeFi products (e.g. custodial cryptocurrency exchanges).

• Similarly to traditional financial products (e.g. savings accounts), CeFi products take control of user funds, meaning that the main risk for users is custodian fund mismanagement.

• Custody Cover may protect against custodian hacks, bankruptcies, and halted withdrawals for an extended period of time without prior warning.

• What is Custody Cover?

Custody Cover is a version of insurance designed for centralized finance that applies to fund loss resulting from a pre-specified list of events. Custody Cover is frequently offered by DeFi insurance providers, though the products for which it is available are not decentralized, by definition.

Cover vs. insurance

As DeFi insurance providers may not be insurance companies or mutuals, and cryptocurrency is not legal tender in most countries, cover is a more accurate term than insurance for this type of fund protection.

What it may cover

Custody Cover offers CeFi product-specific protection against:

• Theft: fund loss as a result of criminal activity (e.g. hacks, fraud), that affects the custodian
• Halted fund withdrawals: the user is prevented from accessing funds for an extended period of time without prior notice from the custodian Unlike traditional insurance policies, which have been standardized over the decades, Custody Cover varies in terms of scope, including how much of a loss is required to submit a qualifying claim, and how long a user must wait after they lose their funds to submit a claim.

Typically, the user must provably lose 10% or more of the funds stored with the custodian for their claim to be approved by a DeFi insurance provider.

What it may not cover

Custody Cover will not apply to events excluded from the original cover language, or that occur outside of the cover period. As Custody Cover is typically asset and product-specific, it will not apply to losses resulting from or related to:

• Cryptocurrency price volatility
• NFT price volatility
• Stablecoin depegs (see Stablecoin Depeg Cover)
• Yield token depegs (see Yield Token Cover)
• Scams (e.g. phishing)
• User error
• The use of another CeFi product
• DeFi protocol use (see Protocol Cover)

How to choose Custody Cover

• Identify which custodian to purchase cover for.
• Next, find DeFi insurance providers that offer coverage for that custodian.
• If there are several options, compare them in terms of their claim assessment mechanisms, scope of coverage, price, and other metrics outlined in How to choose DeFi cover.
• Select the cover period.
• Purchase cover.