Within the financial services industry, the role of custodian is the safekeeping of
physical or electronic assets on behalf of customers. Custodians provide the first
line of defense with software, hardware, rigorous security policies and
procedures, and physical security measures. These operational practices are
necessary for the safekeeping of assets, but not the only ways in which
custodians deliver valuable protection. Due to their specialization, sophistication,
resources, and scale, custodians also have the ability to procure commercial
insurance which acts as a financial backstop and reduces counterparty risk faced
by the owner of assets under custody.
Today, the greatest threat posed to institutions holding digital currencies is the theft or loss of private key(s), whether in digital or physical format. As many digital currencies are essentially bearer assets, it can be difficult or impossible to recover funds once a transaction has been approved and added to the blockchain. As a result, many custodians are implementing an additional layer of protection against theft or loss of private key(s) in the form of commercial insurance policies. These risk transfer solutions are tailored to address the unique risks associated with providing financial services to this emerging asset class, but the quality and availability of these solutions is far from standardized.