Where Captive Insurance Fits in the Digital Asset Risk Landscape

Cryptocurrency has evolved in recent years from a niche asset class into a broader financial and technology ecosystem with significant institutional participation. Roughly 716 million people worldwide owned cryptocurrency in 2025, according to a16z estimate, which was up about 16 percent from the previous year. And while crypto at first was overwhelmingly associated with individual investors, that changed with the introduction of US spot Bitcoin and Ether exchange-traded funds.

As the global crypto-asset market capitalization approaches nearly $3 trillion, it represents an opportunity for captive insurance companies to help safeguard an emerging industry whose volatility traditional insurers have baked into substantial exclusions and costly premiums.

The question then becomes, are captives becoming the missing middle layer between digital-asset firms' balance sheets and an increasingly selective commercial insurance and reinsurance market?

Crypto risks in the traditional insurance market land somewhere between cyber, crime, professional liability, custody, and regulatory coverages, according to Jeremy Colombik, managing partner of Management Services International. He says these policies can often include a host of exclusions, high deductibles, capacity constraints, uncertainty of losses from hacking, social engineering, employee misconduct, failure of a vendor, or an unauthorized transfer. 

"The best role for captives is not to insure the volatility of the token price or speculative losses but finance the operational risk that may include cyber, employee theft, wall security failures, errors and omissions policies for technology, and perhaps a loss layer that is being retained by the company," Mr. Colombik explains. 

He says captives can provide a risk-financing tool for predictable retained losses, fill commercial market gaps, allow companies to retain more control over policy language and claims, and create a better structure for obtaining reinsurance above and layers retained in the captive.

While digital asset firms are a credible potential growth segment for captives, RYSKEX Inc. CEO Dr. Marcus Schmalbach sees a more selective opportunity ahead. A custody business, token issuer, exchange, and digital-asset investment fund may operate in the same ecosystem, yet he notes that they present fundamentally different risk profiles.

"A captive becomes useful when a firm can identify a defined loss event, demonstrate effective controls, quantify a plausible loss distribution, and commit capital to retain a deliberate portion of that risk," he explains.

Martin Ellis, senior vice president and manager of Comerica Bank's global and captive insurance group, has seen many captives cover cyber risks such as data breaches, ransomware events, and business-interruption losses. But he hasn't yet seen widespread use of captives to insure digital asset-related risks.

"We believe there may be limited insurance capacity for certain digital asset exposures in the traditional insurance market, particularly as these risks continue to evolve," he says. As a result, it could make sense for companies with significant digital asset exposures to consider using their captive to insure some of these risks."

As with any emerging risk, however, he believes the coverage would need to involve a bona fide insurable risk rather than investment or market value risk, be supported by appropriate actuarial analysis, and approved by the captive's regulator.

WTW reported last year that digital-asset insurers were broadening their appetite and that new capacity was entering the market, but they also were demanding detailed information on financial stability, liquidity, business plans, custody, and crime controls.

One serious concern about the cryptocurrency space is phishing attacks hacking into crypto firms and stealing digital assets, cautions Jack Meskunas, managing director of investments at Oppenheimer & Co. Inc., who admits he has never been a crypto fan.

"Ensuring the chain of custody and insuring against theft or loss has been one of the first places that captive use in crypto companies has found a home," he notes.

New Way of Viewing Money

One example of where the worlds of cryptocurrency and captive insurance intersect involves Barbados-based Tabit Insurance, which provides a segregated cell structure to optimize capital efficiency, as well as risk management and rent-a-captive solutions as a means for self-insurance.

A segregated cell structure can allow different digital asset exposures to be separated financially and legally rather than putting everything into one captive balance sheet. A rent-a-captive or segregated cell arrangement also could be an entry point for smaller crypto companies that aren't large enough to justify establishing their own stand-alone captive.

"Protected or segregated cell structures can be useful because of the cost efficiencies over a stand-alone captive," Mr. Colombik observes. "A cell can separate different affiliates, custody platforms, token types, and risk categories." 

While a segregated cell can be useful where distinct businesses, portfolios, or participants need separately identified assets and liabilities, Dr. Schmalbach points out that segregation is a legal and operational proposition, not a label on a spreadsheet.

"Its effectiveness depends on the applicable cell legislation, governing documents, contracts, asset ownership, accounting, banking and custody arrangements, and how the structure would operate under stress or insolvency," he explains.

"I'd say the big innovation is that we're just dollarizing Bitcoin on our balance sheet, and then once it's dollarized, it's just dollars," explains Stephen Stonberg, Tabit's CEO and cofounder. "So, we're really innovating the balance sheet, but it's more that we have access to a new form of capital."

Likening Bitcoin to gold, he says it's a commodity with no return people pay to store that can be described as a lazy asset offering a new way to view money.

The US Securities and Exchange Commission and Commodity Futures Trading Commission last March formally established a 5-category digital asset taxonomy and classified 16 major cryptocurrencies as digital commodities rather than securities. Of those cryptocurrencies, Bitcoin dominates the market.

Stablecoins are dollars that settle on a blockchain ledger versus the Society for Worldwide Interbank Financial Telecommunication and traditional banking rails. Any resistance to embracing this new asset class hinges on perception. A perceived reputation risk is always why premiums are higher in frontier markets, Mr. Stonberg notes.

Holding Bitcoin with a 50 percent loan to value means that dollar balance sheet is twice as large as it would be if dollars were held. "We're actually very de-risked and have great solvency ratios," he explains, adding that perceived reputation risk is the biggest challenge "even though we have a safer balance sheet than some of the rated traditional leveraged reinsurers that are perceived as less risky."

In explaining why this emerging asset class is not that risky, he says it's on the balance sheet of BlackRock. "How much more institutional approval do you need?" he wonders. Unlike capital markets, Mr. Stonberg believes the insurance industry needs 5 or 10 years of actuarial data to develop a comfort level when it comes to doing something new.

Noting how the insurance industry is far behind in its understanding of cryptocurrencies that are a legal source of wealth in very high demand, he sees a need for better education.

"The insurance industry is always looking for new sources of capital," he says. "They've tapped the capital markets for bonds, but with Bitcoin at today's prices, it's a $1.5 trillion asset class. So, if you can get some of that into insurance balance sheets, clearly that's an interesting truly new source of capital, and it's uncorrelated."

Capital Versus Asset-Price Volatility

In assessing captive appetites for crypto, Dr. Schmalbach says the distinction between capital volatility and asset-price volatility is particularly important. A captive, for example, may help a firm manage the financial consequences of a specified operational loss, subject to its policy terms and capital position.

"It cannot make the market value of a token stable, guarantee redemptions, or transform a speculative investment into an insured deposit," he explains. The National Association of Insurance Commissioners notes that cryptocurrency insurance protections remain limited and generally do not address market fluctuations or a range of blockchain-related losses.

Referencing a hypothetical institutional custodian with $2 billion of client assets under custody, Dr. Schmalbach says a captive could retain a defined first-loss layer while a commercial insurer or reinsurer considers a separately specified excess layer. Whether that structure is available depends on the actual risk, terms, and market appetite.

"The most promising role for captives is therefore not to absorb the entire uncertainty of digital assets," he says. "It is to turn a broad, poorly understood category into specific, governed exposures that an insurer can evaluate."

A captive can help close traditional insurance policy gaps by retaining a clearly defined layer, collecting better exposure and loss data, and creating a disciplined interface with external markets, according to Dr. Schmalbach. "It does not repair an ambiguous policy by sitting behind it," he explains. "If the underlying event, insured interest, or valuation basis is unclear, those questions must be resolved before risk is transferred."

Examples might involve an unauthorized transfer of identifiable client assets if a custodian loses control of a signing key, temporary inability to access assets that remain intact, or a subsequent fall in market prices. Each of these scenarios can produce very different legal liabilities and insurance outcomes. "A credible captive insurance program would distinguish them rather than combine all three under a single headline limit," he says.

The bottom line is that a captive should make risk more transparent, Dr. Schmalbach observes. He says a well-designed program creates an auditable connection between the underlying exposure, controls, supporting capital, and contractual protection purchased. "That discipline is particularly valuable in digital assets, where technical sophistication can otherwise obscure very conventional questions about ownership, liability, and the ability to pay," he adds.