Brian Armstrong, the Co-Founder and CEO of Coinbase,
Xapo founder and CEO, Wences Casares, told Fortune:
It’s hard to do a consumer business well at the same time as an institutional business. Earlier this year, we looked for a home for it.
Xapo's blog post about the sale of its instititional custody business further explains how Xapo arrived at this difficult decision:
Today, we don’t charge our clients anything to hold their coins in custody and service them. It is getting expensive to support this business, especially the insurance and minimum capital requirement. However, without providing additional features and service, we felt it wouldn’t be fair to start charging our clients a fee.
It also explains why this business was sold to Coinbase Custody:
We believe that in choosing Coinbase, the Institutional Custody Business is going to a company that can provide great insurance, borrowing and investment alternatives that we are not offering. Coinbase has top notch security and they are fully insured. They are a qualified custodian and a NY Limited Purpose Trust Company. They are a fiduciary under NY Banking Law and all assets are held in trust for the benefit of their clients. Additionally, they have a pipeline to offer wide financial services for large holders.
Casares says although Xapo had higher bids from other companies, the other bidders "lacked the security or regulatory credentials to be acceptable to Xapo’s clients." One of those clients, Grayscale Investments, agreed to transfer around $2.7 billion worth of digital assets that it manages (over 225,000 bitcoins) to Coinbase Custody in early August (this news was announced on August 2). Fortune says that, according to one source, "the majority of Xapo’s largest clients have agreed to transfer their assets to Coinbase, giving the company control of over 514,000 Bitcoins." It also says that the "remaining Xapo customer accounts are reportedly worth over $3.5 billion, and if Coinbase can sign on those customers as well, the company will have over 860,000 Bitcoins under custody."
Rumors of this deal first appeared in May in news outlets Axios and The Block; however, the deal took this long to complete "due to the sensitivity over transferring customer assets, and details such as who would take possession of the Swiss vault." Xapo's Bitcoin vault in Switzerland has "elaborate security measures that reportedly involve armed guards and multiple layers of granite inside a mountain." Casares says that his company will maintain ownership of the vault, which it will use for storing Bitcoin belonging to its retail customers. Fortune says that now that Coinbase Custody has completed this acquisition, it has over 150 institutional clients.
Armstrong told Fortune:
Custody is a critical step toward the institutionalization of crypto economy. It’s likely to start off small—maybe a few billion under custody—but it will grow quickly to a point that it’s a meaningful piece of stable, recurring revenue for the company.
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Siamak received his PhD in Computer Science from University of London in 1992. He has worked as a research scientist, technical author, software developer, and journalist. Since 2014, he has been researching cryptocurrencies and other applications of blockchain technology.