Introduction

The Web3 and digital asset sector is developing at high speed, creating new possibilities for innovation but also exposing companies to complex risks. As adoption increases, regulators are tightening oversight, cybercriminals are becoming more sophisticated, and institutional investors are demanding higher standards of governance and security.

The Fraction Report is a regular deep dive into the evolving risk landscape for digital asset businesses. In each issue, we share the developments that matter most to our clients and explain how the right insurance coverage can help them move forward with confidence.

1. Smart Contract Exploits Continue to Rise

In the last quarter, a major DeFi lending protocol suffered a reentrancy exploit that drained more than 40 million USD in assets. While security audits are becoming more common, vulnerabilities still emerge due to protocol upgrades, integration with other projects, and newly discovered attack methods.

Risk Perspective:

Platform operators may be held responsible for losses caused by vulnerabilities in deployed code. Without technology errors and omissions (Tech E&O) or specific smart contract liability coverage, the financial and reputational damage can be severe.

Insurance Insight:

Coverage should include both pre‑launch testing and post‑deployment protection. Even well‑audited code can become exploitable over time, and insurance can provide a safety net when prevention measures fail.

2. Custody Innovation Under Regulatory Review

Custody remains central to digital asset trust and is increasingly a focus for regulators. In Hong Kong, the Securities and Futures Commission (SFC) is examining hybrid custody models that combine regulated third‑party custodians with self‑custody and multi‑signature wallet setups.

Risk Perspective:

While hybrid models can reduce single points of failure, they also add complexity to operational risk management. Regulators and underwriters want detailed, auditable custody workflows before approving licensing or coverage.

Insurance Insight:

Theft and loss policies often depend on clear documentation of custody processes. Ambiguity in procedures can lead to disputes or rejected claims, so companies should ensure custody arrangements are fully documented and regularly reviewed.

3. Regulatory Convergence in APAC

Across Asia, regulatory expectations are becoming more aligned. Both the SFC in Hong Kong and the Monetary Authority of Singapore (MAS) now expect licensed virtual asset service providers (VASPs) to carry insurance for:

• Custody theft or loss

• Cybersecurity breaches

• Technology and operational failures

• Regulatory investigation defense costs

Risk Perspective:

Not having insurance in place can delay license approvals, disrupt launch timelines, and create barriers to entering new markets.

Insurance Insight:

Integrating insurance planning into compliance and licensing strategies ensures that coverage requirements are met without last‑minute delays.

4. Cyber Threats in the Age of AI

Cyberattacks are becoming faster and more targeted as criminals use AI to create realistic phishing campaigns, identify vulnerabilities, and automate exploit deployment. Automated trading systems and yield‑generating protocols are prime targets because of their always‑on nature.

Risk Perspective:

AI‑assisted attacks can bypass traditional cybersecurity controls and exploit both human and algorithmic weaknesses. Standard cyber liability policies may not explicitly cover AI‑driven fraud or social engineering incidents.

Insurance Insight:

Review cyber coverage to confirm it includes AI‑related risks. Businesses should also consider adding social engineering protection that covers both human error and automated exploits.

5. How Fraction Brokers Asia Supports Clients

Our role is to help digital asset businesses navigate these evolving threats with insurance programs that are both comprehensive and cost‑effective. We work with companies to:

• Secure theft, cyber, technology, directors and officers (D&O), and regulatory defense coverage

• Map custody and operational risk to specific policy terms

• Align insurance with licensing requirements in Hong Kong, Singapore, and other APAC markets

• Address emerging threats such as AI‑enabled cybercrime and advanced smart contract exploits

Conclusion

The Web3 landscape offers immense opportunity but also unprecedented risk. From evolving custody models to AI‑driven cyberattacks, the challenges facing digital asset companies require proactive risk management.

With the right insurance in place, companies can meet regulatory expectations, reassure stakeholders, and recover quickly from incidents. The Fraction Report will continue to track these developments and provide actionable insights for staying ahead in this fast‑moving sector.

📩 Contact Fraction Brokers Asia to discuss how a tailored insurance program can protect your business and help you grow with confidence.