When You Cross Into DeFi, You Inherit Two Compliance Frameworks at Once

For companies migrating from TradFi into DeFi, the instinct is to treat it as an expansion. A new product line, a new customer segment, a new market. What it actually creates is a doubled compliance surface, where both frameworks apply simultaneously and can actively conflict with each other.

Traditional regulation is built around licensed entities and defined counterparties. DeFi regulation is still catching up, with authorities across the EU, US, Singapore, and the UAE each moving at different speeds and in different directions. A product structure that satisfies one regulator may trigger licensing requirements in another jurisdiction. A token treated as a utility in one market may be classified as a security in a neighbouring one.

The compliance complexity is not a temporary growing pain. It is the permanent condition of operating at this intersection, and it compounds with every new market you enter.

The Insurance You Carry Was Built for a Different World

Most companies making this transition carry professional indemnity and D&O insurance as a matter of course. The assumption is that if a regulatory issue arises, the policy responds. For companies at the TradFi/DeFi intersection, that assumption is unreliable.

As the crypto market grew, many insurers quietly introduced silent crypto exclusions into existing policy language, often without the policyholder’s knowledge. The exclusion sits buried in definitions or exclusion schedules, removing coverage for claims related to digital assets, blockchain activity, or decentralised protocols. The policy still exists. The protection against your actual risk exposure does not.

Companies discover this at claim time. A regulatory investigation triggers. The firm turns to its PI policy. The insurer declines to respond. The coverage was always there in name. The protection was not.

The Gaps That Emerge at the Intersection

These are not theoretical exposures. They surface under pressure, during investigations or enforcement actions, when options are most constrained. The most common gaps include:

Regulatory defence costs: Many standard policies cap or exclude the costs of responding to regulatory investigations. Digital asset regulation frequently involves novel areas of law where defence costs are high and timelines are long. D&O Insurance and Professional Indemnity, structured correctly, cover the legal and regulatory defence costs that arise when executives or the firm itself face scrutiny.

Cross-border exposure: Policies built for one regulatory framework may not respond to enforcement action brought under another. Our Fintech Insurance package and D&O Insurance with multi-jurisdiction endorsements are better suited to companies operating across Singapore, Hong Kong, the UAE, and beyond.

Token-specific liability: Standard PI policies often exclude claims arising from token issuance or smart contract failures. Our Digital Asset Insurance package and Tech PI Inc Cyber address this gap directly, covering losses tied to digital asset operations that standard policies miss.

None of these gaps are inevitable. They are far easier to address before an incident than after one.

Why Specialist Advice Matters

The insurance market has not kept pace with the migration from TradFi to DeFi. Many generalist brokers work from frameworks that were not designed for this environment. Companies end up with advice that is technically competent but contextually incomplete: coverage built for a risk profile that no longer reflects how the business actually operates.

Specialist advice closes that gap. It surfaces silent exclusions and coverage shortfalls before they become a problem. It also enables proactive structuring: bespoke coverage for digital asset risks exists, but finding it requires knowing where to look. As the regulatory landscape continues to shift across multiple jurisdictions, specialist advisers help companies adjust their risk strategy before the gaps matter.

How Continuum Can Help

Continuum specialises in insurance advisory and risk consultancy for companies operating at exactly this intersection. We work with fintech and digital asset businesses to review existing policies for silent exclusions and coverage gaps, and structure bespoke coverage that reflects their actual risk profile.

If you are unsure whether your current coverage reflects your actual risk exposure, we can help you find out before it matters. Get in touch at with us here.

What makes this event notable is not the scale alone, but how it happened.

The Details

There was:

• No zero-day smart contract bug
• No obvious coding flaw
• No traditional “hack” in the conventional sense

Instead, the attacker leveraged a legitimate blockchain feature, combined with compromised governance approvals, to execute a highly coordinated withdrawal of funds. This marks a critical evolution in digital asset risk. The uncomfortable truth: the system worked as designed

At the center of the exploit was a Solana feature called durable nonces—designed to improve usability by allowing transactions to be pre-signed and executed later.

In isolation, this is a feature. In the wrong hands, it becomes an attack vector.

By obtaining partial control of governance approvals (via compromised signers), the attacker was able to:

• Pre-authorise transactions in advance
• Delay execution
• Trigger them simultaneously

The result: a rapid, legitimate-looking drain of protocol funds

• This is not a failure of code.
• It is a failure of assumptions.

The rise of “combinatorial risk” in DeFi. The Drift incident highlights a growing class of exposures we define as combinatorial risk:

Risks that emerge not from a single vulnerability, but from the interaction of multiple valid system components.

In this case:

• A governance structure (multisig approvals)
• A blockchain feature (durable nonces)
• Human trust assumptions (signer behaviour)

Individually secure. Collectively exploitable. This is where traditional risk frameworks begin to break down.

Why this matters for institutional participants

For funds, exchanges, custodians, and protocol operators, this event challenges three widely held assumptions:

1. “Audited code = secure system”

Smart contract audits remain essential—but they are no longer sufficient. The Drift exploit bypassed code risk entirely and instead targeted:

• Execution mechanics
• Governance pathways
• Operational controls

2. “Multisig = strong governance”

Multisig structures are often treated as a gold standard.

However:

• Threshold design matters
• Signer independence matters
• Approval context matters

A multisig is only as strong as its weakest human layer.

3. “Blockchain transparency = early detection”

In theory, all transactions are visible.

In practice:

• Pre-signed transactions reduce visibility
• Delayed execution compresses response time
• Attacks can occur faster than monitoring systems can react
• A new category of insurable risk

Events like Drift sit at the intersection of:

• Cybersecurity
• Fraud / social engineering
• Governance failure
• Protocol design risk

This creates a gap.

Most traditional insurance solutions:

• Focus on system breaches or external attacks
• Do not fully capture protocol-native failure modes

Yet losses are real, material, and increasing in frequency.

What needs to change

To address this new risk landscape, institutions should be thinking beyond code audits:

1. Governance architecture as a risk surface

Review signer selection, independence, and incentives Stress test approval thresholds under compromise scenarios

2. Transaction design and execution controls

Limit use of delayed / pre-signed transaction mechanisms. Implement real-time validation layers for high-value actions

3. Scenario-based risk modelling

Move beyond static audits.  Simulate multi-vector attack scenarios (technical + human + design)

4. Insurance that reflects real-world failure modes

Coverage must evolve to include:

• Governance compromise
• Operational manipulation
• Protocol feature exploitation

The Continuum Perspective

At Continuum, we view this as part of a broader shift:

The primary risks in digital assets are no longer purely technical—they are systemic, behavioural, and architectural.

As the industry matures, the most significant losses will increasingly arise from:

• Misaligned incentives
• Overlooked design interactions
• Human-layer vulnerabilities embedded within decentralised systems

The Drift exploit is not an outlier. It is an early signal.

Final thought

Innovation in blockchain has consistently prioritised speed, efficiency, and composability. But every layer of convenience introduces new forms of risk.

The question for institutions is no longer:

“Is the code secure?”

It is:

“How does the system behave when every component works exactly as intended—but in the wrong combination?”

While DeFi offers innovation and yield, it also introduces a persistent structural challenge: custody.

In traditional finance, licensed custodians are responsible for safeguarding client assets. In DeFi, however, custody is often fragmented—distributed across protocols, wallets, and governance mechanisms. Without a central authority or liability buffer, fund managers become directly accountable for protecting assets.

This decentralized structure has created one of the most overlooked vulnerabilities in digital asset management today.

When Protocols Fail, Fund Managers Are Left Exposed

Custody failures in DeFi can stem from a range of issues—code exploits, admin key misuse, front-end compromises, or governance breakdowns. While the root cause is often technical, the responsibility ultimately falls on the fund interacting with the protocol.

Real-World Impact: When Custody Breaks Down, Losses Escalate

Case 1: BadgerDAO Interface Exploit (2021)

In December 2021, attackers compromised BadgerDAO’s front end, injecting malicious scripts that tricked users into authorizing unauthorized transactions. More than $120 million in assets were drained, including funds from institutional vaults.

Key Lesson: Even if the smart contract is secure, off-chain components—like the user interface—can create critical vulnerabilities. Without third-party custodians, the fund becomes the de facto custodian.

Case 2: Curve Finance Vyper Exploit (2023)

In mid-2023, a vulnerability in legacy Vyper compiler code led to over $60 million in stolen assets. Liquidity providers who had deposited into affected Curve pools found themselves suddenly exposed to a critical coding flaw.

Key Lesson: Depositing into a protocol is a custodial act. Once assets are committed to a smart contract, managers assume the consequences of underlying protocol risk, even if that risk is downstream and indirect.

Custody Risk is a Growing Regulatory Concern

As institutional capital enters DeFi, regulators across Asia and Europe are sharpening scrutiny around custody practices. In Singapore, the Monetary Authority of Singapore (MAS) now mandates that crypto service providers:

• Segregate client assets

• Store at least 90% of assets in cold wallets

• Maintain strong internal controls over access and transfers

Fund managers operating in DeFi, however, often engage with smart contracts that don’t meet conventional custody standards. In the absence of a licensed custodian, regulators now hold the fund directly accountable

Key Categories of Custody Risk in DeFi

• Smart Contract Risk: Bugs, logic errors, or unaudited code controlling user funds

• Key Management Risk: Private key loss, inadequate multisig design, or collusion

• Governance Risk: Admin key centralization, DAO takeovers, or malicious upgrades

• Third-Party Interface Risk: Compromised wallets, web UIs, or transaction signing tools

• Reputational Risk: Investor backlash following a protocol loss linked to custody missteps

How Insurance Can Help Fund Managers Mitigate Custody Risk

While technical due diligence is critical, insurance can play an increasingly important role in reducing the financial impact of custody failures:

Crime Insurance – Protects against theft or fraud involving insiders, external attackers, or collusion—especially in cases involving multisig wallets or protocol-level governance roles.

Specie Insurance – Covers loss or theft of private keys, cold wallets, and other physical or digital custody infrastructure.

Investment Management Insurance (IMI)– Provides professional liability coverage for fund managers, including exposure to claims tied to custody decisions, DeFi protocol failures, or investor losses.

How Continuum Supports DeFi Fund Managers

At Continuum, we work with digital asset funds, VC-backed crypto vehicles, and on-chain strategy platforms to identify, assess, and insure custody-related exposures. Our support includes:

1. Tailored insurance program design aligned with fund structure and custody model – we can work with existing custody providers.

2. Risk reviews of key management setups, smart contract interactions, and protocol dependencies

3. Coverage gap analysis, ensuring DeFi risks are not excluded from traditional PI or D&O policies

4. Claims support in the event of loss arising from exploits, protocol breaches, or wallet compromise

DeFi doesn’t eliminate risk—it redistributes it. As fund managers navigate this evolving ecosystem, custody risk must be treated as a core operational exposure—not a peripheral technical issue.

Get in touch to learn how Continuum can help structure insurance solutions that scale with your fund’s DeFi strategy.

DeFi explained

DeFi, or Decentralised Finance, is a rapidly growing ecosystem of financial applications and services built on blockchain technology. DeFi platforms harness this technology to produce an incorruptible ledger of economic transactions which exist as a shared database on the computers of millions of people simultaneously. This decentralisation reduces the reliance on single points of failure and enhances security.

DeFi protocols can interact with each other enabling different DeFi services to be combined to create complex financial products and services. DeFi has succeeded in recreating traditional financial services, such as lending, borrowing, trading, and investing, in a decentralised manner, eliminating the need for intermediaries like banks and financial institutions.

DeFi is also being used in the insurance industry as an alternative to traditional insurance models.

The traditional insurance model

The legacy insurance model that has served as the norm for decades involves risk pooling. Customers mitigate the financial risk of certain events by paying premiums to an insurance company. The premiums collected by the insurance company are pooled and insurers calculate that the amount they collect from many individual policyholders with a low risk of incurring losses will exceed the amount they will have to pay out in claims.

This process involves the assessment of risk and setting of premiums. Claims are assessed and handled by human experts. Risk is pooled through a centralised entity and assessed by actuaries. Claims adjusters are used to verify losses and determine the payout a policyholder will receive. It can be expensive and time-consuming, but this model has endured for decades, and is only now being threatened by a new pretender.

The advantages of traditional insurance

Traditional insurance enjoys certain advantages that DeFi insurance cannot yet boast. These include:

• An established regulatory structure – oversight from government and regulatory bodies guarantees that insurers adhere to established norms and safeguards the welfare of policyholders. Consumers understand this compliance framework and trust that they are being protected.
• Longevity and financial stability – Individuals and businesses are reassured by the track record of established conventional insurers who they assume possess the financial reserves to cover claims and meet their contractual commitments. They trust these providers because of their long history.
• Familiarity bias – Consumers understand the traditional insurance landscape and how it works. There is a certain familiarity bias in the way policies are issued and claims are dealt with under the conventional model.

What is DeFi insurance?

Blockchain technology is revolutionising the traditional insurance model with the emergence of DeFi insurance, a decentralised model of insurance that many digital asset companies are turning to in order to mitigate risks including hacks, theft, scams, mistakes or natural disasters. With DeFi insurance, decentralised platforms use self-executing smart contracts to automate and streamline the insurance process without compromising security.

Predefined codes are written into the policies and executed transparently on the blockchain. The code is the policy and also manages the policy. This eliminates the need for intermediaries and centralised authorities such as claims adjusters.

Nexus Mutual is an example of a one such firm that provides discretionary mutual coverage for various DeFi projects. Essentially their platform is an automated version of a very old structure where members share risks together. Nexus does this by allowing members to decide how risks should be priced, along with how claim payments should be made.

The Benefits of DeFi insurance

Although DeFi insurance doesn’t (yet) have the proven track record and consumer trust that traditional insurance enjoys, it does offer numerous benefits:

• Decentralisation and transparency – Smart contracts operate on decentralised blockchain networks. No single entity controls them, and they are visible to all on the chain, guaranteeing transparency, security, and immutability of contract execution.
• Democratisation – All that is needed to access DeFi insurance platforms is an internet connection. Anyone can take out relevant cover irrespective of their location.
• Lower costs – Middlemen such as underwriters and claims adjusters become superfluous to the process. Cutting out these intermediaries simplifies the insurance process and lowers costs.

Of course, DeFi is not infallible. There are risks, which include smart contract vulnerabilities, a lack of regulation, and potential for hacking, theft, loss etc.

Insuring digital assets: DeFi insurance versus traditional insurance

For digital asset companies there are several compelling reasons to favour DeFi insurance over traditional insurance.

Conventional insurance is ill-suited to safeguarding digital assets. Traditional insurers are stringently regulated and must carry out strict KYC checks. These may not be possible for many digital assets that are primarily stored in anonymous wallets.

Secondly, traditional insurance relies on historical data and a deep understanding of risk-influencing factors for risk assessment. Blockchain technology emerged in the early 1990s and only entered the mainstream after the emergence of Bitcoin in 2008. The lack of historical data related to digital assets makes it very difficult to develop statistically significant pricing models. In addition, traditional insurers lack the expertise to assess the technical complexity of the risks associated with digital assets.

Another challenge for traditional insurers is that digital asset risks often impact a large number of individuals simultaneously, unlike other business risks such as fire, injury or professional liability. This creates difficulties in efficiently resolving individual claims.

Finally, there is an inherent misalignment between traditional insurance, which deals in fiat currency, and the digital asset ecosystem. This makes managing workflows effectively difficult for traditional insurers who lack the necessary systems to facilitate fiat-to-crypto conversions.

DeFi insurance for digital asset companies

DeFi insurance is still in the early stages of development and digital asset companies looking for effective risk mitigation currently have a limited choice. To date most of the focus has been on provide coverage for protocols rather than broader coverage for institutions but this is changing as the market matures and grows.

It has been estimated that only 1% of crypto investments are covered by insurance but with cryptocurrency hacks still on the rise – an estimated $3.1 billion was stolen in 2022 – it is foolhardy for digital asset companies not to protect against the risks.

Continuum is at the forefront of this nascent and rapidly evolving industry. We have been working with digital asset companies in Asia for over five years, helping many startups to find the right solution for their business. Whether you are a digital asset custodian, blockchain developer, miner or tokenisation platform, we can find appropriate solutions to protect your business and offer value to your clients. Whether this is with the traditional insurers or DeFi insurers or possibly a combination of both we will work with you to find the best solution.

Contact Us to discuss how we can assist on your journey to success in the brave new world of digital assets!