Why would they do that? You need regulatory decisions from the government to force them. Otherwise, it would be easy for them to invest user assets in more advertisements or other investments and grow the user base quickly. In fact, the abuse of customer funds exists in banks even though they are highly regulated institutions, let alone CEXs which is multinational and there is weak regulatory over it.
FTX is an example of how mishandling customer funds can cause the platform to grow quickly and in a short period of time. As long as users can withdraw easily, no user will have to ask if their funds are insured.
After the FTX incident, CEXs have announced proof of reserves to gain user trust. Proof of reserves proves that CEXs are holding enough user assets instead of using them for CEXs own purposes as in the case of FTX. The same could happen for the existence of insurance contracts for CEXs crypto assets: it affirms that in case CEXs have problems with hackers, CEXs' losses will be compensated and users will not be affected.
In the past, Binance was hacked and Binance used its budget to compensate users, which is also good but not guaranteed on any basis. An insurance contract will help users trust and use CEXs more regularly, CEXs will have more users and revenue from transaction fees.
With this insurance contract, CEXs may not need to maintain their own funds like SAFU, they can use this money more effectively to generate more profits for CEXs and provide more value to users.
Although it's a good idea that for people to start adopting the insurance policies into crypto industry but in a rational sense does it not negate the initial purpose of self custodian wallets which we all advocate as the best for storing our crypto assets.
From the arguement of @hugeblack and including what I perceive personally I think that the idea is defeated already because the crypto insurance company mentioned above can not be able to handle a complete exchange assets because the capacity is limited to handle.
Infact generally if this insurance companies as proposed are going to be creating a cold storage wallet for storing this assets then what difference does it make from one creating his own cold storage wallet, the only special feature here is the fact that compensation is available for ones assets if eventually anything happens but that doesn't really matter for me because it will surely obstruct ones free will on how and when to take ones assets.
I think we should wait for a first case to join crypto insurance, I hope it will be Coinbase or Binance. Currently, I understand that if they join the insurance, CEXs will need to prove the reserve in cold wallets or use MPC, then pay a corresponding amount of insurance premium to the insurance company to be able to be compensated up to 825M USD in case the reserve is attacked and damaged.
I am also very curious about the application of insurance for crypto, I want to understand more clearly to be more confident when using and storing a part of my assets on CEXs.
