What is custody insurance?

A policy an exchange or custodian buys to cover theft of the crypto it holds, usually limited to hot-wallet balances and to the custodian's own failures.

It does not cover price falls, your own account being phished, or the platform going bankrupt. Government deposit insurance schemes for bank accounts do not cover crypto, and a claim that funds are "insured" frequently rests on one of those schemes covering the fiat balance only.

The gap between what these policies say and what customers assume is one of the widest in the industry. The policy protects the company against a specific loss and pays the company, and whether that reaches you depends on the terms of your account rather than on the policy.

How it works

Coverage is generally a crime policy sitting over specified risks: theft from hot wallets, insider theft, and physical loss or damage to key material. Cold storage is often covered on different terms or through a separate arrangement, and the limits are stated per incident rather than per customer.

Four exclusions do most of the work in practice:

1. Your own credentials. If an attacker logs in as you, whether by phishing, a sim swap, or malware, that is not a breach of the custodian and is not covered.
2. Insolvency. Insurance responds to theft, not to a company owing more than it holds.
3. Aggregate limits. A policy covering 250 million dollars across a platform holding several billion covers a fraction of customer assets, and the limit is shared rather than per account.
4. Protocol and market losses. A smart contract exploit in a yield product, a depeg, or a liquidation are not covered events.

The fiat side is narrower than people assume. The FDIC states that deposit insurance does not apply to crypto assets and that it does not insure assets issued by non-bank entities such as crypto companies (source: FDIC fact sheet on deposit insurance and crypto). Where an exchange holds your cash at a partner bank, any bank deposit protection responds to that bank failing, not to the exchange failing, and never to the crypto.

Example

Illustrative. An exchange states it holds a 300 million dollar crime policy and custodies 6 billion dollars of customer assets. That is coverage for 5 percent of the book, shared across all customers, and applies only to covered theft events. A breach taking 400 million dollars from hot wallets would exhaust the policy and leave a 100 million dollar shortfall to be absorbed by the exchange or by customers. A phishing attack taking 400 million dollars from individual accounts would trigger no payout at all.

Why it matters when you buy

Insurance claims appear prominently in exchange marketing and rarely with limits attached, so they are worth reading as a partial mitigation rather than a guarantee. Custody arrangements and disclosures are inputs to how RampAtlas scores trust and security under our methodology, and the exchange pages record what each venue publishes.

Related terms

cold storage ratio — the split insurance premiums are priced against; custodian — who buys the policy; counterparty risk — the risk insurance only partly addresses; proof of reserves — what holdings are actually verified; hot wallet — the balances usually covered.

Questions

Am I covered if my account is hacked?

Almost never. Policies cover breaches of the custodian's systems, not an attacker who obtains your password and second factor. Some venues operate discretionary reimbursement programs, which are goodwill rather than insurance.

Does FDIC insurance cover my crypto?

No. The FDIC states plainly that deposit insurance does not apply to crypto assets and does not cover assets issued by non-bank crypto companies. Any bank protection that reaches a cash balance responds to the bank failing, not to the exchange failing.

How do I find the actual limits?

Ask for the coverage amount and the total assets under custody, then compare them. Venues that publish the first figure and not the second are giving you half of a ratio.