Coinbase Completes Acquisition of Crypto Custodian Xapo

Coinbase, one of the largest cryptocurrency exchanges, has just acquired the custody business of Xapo, an institutional business service best known for storing Bitcoins (BTC) in a vault under a Swiss mountain. The acquisition follows Coinbase’s plans to expand its custody services, and could eventually lead to the San Francisco – based exchange storing over 5% of all Bitcoins in circulation.

According to an announcement made on Thursday, Xapo has been acquired for $55 million which was enough to outbid another strong contender – custody giant Fidelity. The firm stated that the new acquisition will help expand the company’s custody business as well as increase the assets under custody up to more than $7 billion.

The news follows weeks of speculation over the exchange’s intentions with Xapo, seeing as Coinbase Custody had acquired in early August Xapo’s largest client – crypto-asset manager Grayscale Investments who at the time reported having $2.7 billion under management. This is considered to be one of the largest crypto transactions in history.

Xapo, which launched in 2013, is known for its wallet services including physical storage vaults for Bitcoin, based in Switzerland, which are used to store customers’ crypto assets in an offline environment to ensure the safety of private keys. Prior to Grayscale being acquired by Coinbase, the firm reportedly held $5.5 billion worth of cryptocurrency.

Following the acquisition, Xapo will hold onto its exchange business, which lets ordinary consumers buy and sell Bitcoin. Xapo founder, Wences Casares, has stated that he will maintain his long-time role of CEO. In addition to that, Xapo will keep possession of the vault and use it to store Bitcoins on behalf of its retail customers.

According to Casares the retail exchange business has always been Xapo’s main focus, and the custody business had been established as a side business at a time when wealthy Bitcoin investors needed a secure place to park their digital wealth.

 “In choosing Coinbase, we are confident that the Institutional Custody Business is going to a company that can provide great insurance, borrowing and investment alternatives,” said Casares. “We believe that Coinbase will take this opportunity to prove to our customers that they deserve their business.”

Meanwhile, the majority of Xapo’s largest clients have agreed to transfer their assets to Coinbase, giving the company control of over 514,000 BTC, currently worth $5.3 billion. If Coinbase manages to sign the remaining clients, then its custody service will have more than 860,000 bitcoin in total under custody, worth over $8 billion.

Coinbase CEO Brian Armstrong, has stated that ”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.”

Prior to the acquisition in July this year, Coinbase Custody claimed to hold more than $2.5 billion worth of crypto from roughly 100 institutional clients.

Coinbase’s new custody services will include regulatory support and insurance, as well as staking, which extends to a sort of proxy voting service for cryptocurrencies that have built-in voting mechanisms.

“Fundamentally, we have to help our investors earn a return on their assets. You can imagine lending out Bitcoin and earning interest on that,” said Coinbase Custody CEO Sam McIngvale.

In the meantime, Coinbase isn’t the only company trying to get into the custody space. Earlier this year, startup Anchorage announced $40 million in backing from finance giant Visa as it seeks to lure in more institutional clients. Meanwhile, Palo Alto-based BitGo is also said to be competing to be a player in the custody space.

Digital Assets Custodian BitGo Now Has $100 Million Insurance Plan

Digital assets financial services company BitGo has announced that it now offers a $100 million insurance coverage plan for all crypto assets under its custody, in addition to directors and officers liability insurance, errors and omissions insurance, and cyber theft.

The launch follows extensive due diligence into BitGo’s software, hardware, policies and procedures, allowing underwriters to guarantee cover for those with digital asset holdings in BitGo account. The plan is offered through the Lloyd’s of London insurance syndicate.

In a statement made by BitGo, custodial assets held in BitGo business wallets or in its qualified custodian arm, BitGo Trust Company, will be covered against third-party hacks or the theft of private keys as well as insider theft by employees of private keys and physical loss or damage of private keys.

Mike Belshe, CEO of BitGo, has claimed in a statement that this was the most comprehensive insurance coverage plan in the industry. He further added:

“It is not always easy for some clients to understand under what circumstances their investments are insured and to what extent their loss would be covered. We are changing that by being more transparent than any other company about the terms of our coverage. Transparency and accuracy is essential for building trust in the market.”

The firm will also provide its wallet clients the opportunity to purchase their own insurance directly through Digital Asset Services, a crypto asset insurance firm. Digital Asset Services will provide theft insurance and private key recovery services.

The Lost Key Cover, for instance, is reportedly secure and easy to use. It will be available for purchase either as an annual subscription or when it is needed. Meanwhile, theft Insurance allows BitGo clients to purchase regulated specialist insurance for their assets.

The company has also taken the unusual route of disclosing both the underwriter (AmTrust) and their insurance level of $100 million. According to Chief Security Officer Tom Pageler, this was intentional as he wanted to provide a “very clean and transparent policy” and to show clients there were measures put in place to make sure the payouts happened if necessary. AmTrust reviewed BitGo’s security and controls prior to offering the insurance product.

The new insurance coverage plan follows the QuadrigaCX debacle, where the exchange announced it could not access its cold storage wallets following the death of its founder and CEO, Gerald Cotten, as he was the only company employee to know its private keys.

Apart from the new insurance coverage, the existing ones include directors and officers liability insurance (D&O), errors and omissions insurance (E&O), and Cyber Theft.