Category: Blockchain insurance · Reviewed by Jake Leat, Associate Director · Last reviewed 2026-06-10
DeFi insurance refers to discretionary risk-transfer protocols built on public blockchains that offer cover against smart contract failure, centralised exchange hacks, oracle manipulation and stablecoin depegging events.
Most DeFi “insurance” protocols are structured as discretionary mutuals or staking-based protection pools so as not to constitute a contract of insurance for FSMA 2000 purposes. The FCA has been clear that the characterisation depends on the substance of the arrangement, not on the label.
Definition
DeFi insurance is a sub-category of decentralised insurance focused on risks specific to decentralised finance:
Smart contract failure — losses arising from bugs, exploits or governance attacks in DeFi protocols (decentralised exchanges, lending protocols, yield aggregators);
Centralised exchange custodial loss — historically including events such as Mt. Gox, FTX and Celsius;
Stablecoin depeg — losses arising from a stablecoin trading materially below US$1 (e.g. Terra UST in May 2022, USDC in March 2023);
Oracle manipulation — losses arising from manipulated price feeds; and
Bridge exploits — losses arising from cross-chain bridge compromises.
Cover is typically purchased in stablecoin and denominated against a specific contract address or counterparty.
Legal / Regulatory basis
The UK regulatory treatment of DeFi insurance is set against the FCA’s perimeter and cryptoasset regimes:
Financial Services and Markets Act 2000 and SI 2001/544 — whether a particular DeFi product is a “contract of insurance” depends on enforceability, discretion, the existence of insurable interest and consideration.
Financial Services and Markets Act 2023 — establishes the powers to extend the financial services perimeter to cryptoassets; cryptoasset financial promotions are now within scope.
FCA Perimeter Guidance Manual (PERG 6) — applying Prudential and St Christopher Motorists’ Association.
FCA Policy Statement PS19/22, Guidance on Cryptoassets (July 2019).
HM Treasury, Future Financial Services Regulatory Regime for Cryptoassets (February 2023; October 2023). The Government’s October 2023 response confirmed that DeFi will be regulated under a “same-risk, same-regulatory-outcome” approach, with further consultation to follow.
Financial Promotion Order 2023 amendments — extending the financial promotions regime to qualifying cryptoassets, including governance tokens of DeFi insurance protocols.
EIOPA Discussion Paper on Blockchain and Smart Contracts in Insurance (2021; 2023) — discusses DeFi cover products.
UK Jurisdiction Taskforce, Legal Statement on Cryptoassets and Smart Contracts (November 2019).
Most DeFi insurance protocols expressly disclaim that they are insurance and label their product as “cover” or “protection”. The FCA’s stance is that labelling is not determinative.
How it works in practice
A typical DeFi insurance protocol operates in three layers:
Capital provision — token holders stake tokens (or stablecoins) into a risk pool. Stakers earn rewards from premium and yield, but lose principal in the event of paid claims.
Cover purchase — a DeFi user buys cover for a specific protocol address. The premium is computed by formula or auction, reflecting the demand-to-capital ratio in the relevant pool.
Claims process — on the occurrence of a covered event, the user submits a claim. Assessors (token holders) vote on payouts, using mechanisms such as Schelling-point voting or expert panels.
The protocol’s terms of service typically state that no contract of insurance is formed, no enforceable right to indemnity exists, and the user is participating in a discretionary mutual or staking pool.
Common variations / Subsequent developments
Nexus Mutual — UK-domiciled discretionary mutual, the largest DeFi insurance protocol by TVL.
Bridge Mutual — fully-tokenised cover with stablecoin staking.
InsurAce — multi-chain protocol with portfolio cover products.
Audit-backed cover — Sherlock pairs cover with an audit, aligning incentives.
Stablecoin depeg cover — gained prominence after Terra UST in May 2022 and USDC in March 2023.
Hybrid licensed-backed cover — partnerships with licensed reinsurers such as Munich Re’s pilot work and certain Lloyd’s syndicates.
The FCA’s October 2023 confirmation of intent to regulate DeFi on a “same risk, same regulatory outcome” basis is the most material recent UK development.
Example
A UK-based DeFi protocol developer holds 800 ETH in a yield-bearing strategy. They purchase smart-contract failure cover for that strategy from a DeFi insurance protocol; the premium is 2.4% per annum, paid in stablecoin. Three months later, the strategy is exploited via a re-entrancy bug; the user loses 320 ETH. They submit a claim; assessors vote and approve a payout of 95% of the loss, paid in stablecoin to the user’s wallet. Under English law, no contract of insurance was formed; the protocol’s terms make the payout discretionary; the user benefits because the protocol’s governance approves the claim.
Financial Services and Markets Act 2000 and SI 2001/544.
Financial Services and Markets Act 2023 (legislation.gov.uk).
FCA Perimeter Guidance Manual (PERG 6).
FCA, Guidance on Cryptoassets — PS19/22 (July 2019).
HM Treasury, Future Financial Services Regulatory Regime for Cryptoassets (February 2023; October 2023), gov.uk.
Financial Promotion Order 2023 amendments, SI 2023/612.
EIOPA, Discussion Paper on Blockchain and Smart Contracts in Insurance (2021; 2023).
UK Jurisdiction Taskforce, Legal Statement on Cryptoassets and Smart Contracts (November 2019).
AA v Persons Unknown [2019] EWHC 3556 (Comm).
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-10. Next review: 2026-12-10.
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