Xapo Digital gold custody for wealth managers

By Bernard Lunn

Xapo offers an alternative to storing gold. This is like a return to the Wild West days of banking when the big job was keeping the money safe from Butch Cassidy and the Sundance Kid. Xapo also offers a debit card for spending Bitcoin, but their elevator pitch is clear on their front page:


Learn how you can secure your bitcoins with Xapo’s deep cold storage and multi-signature technology.

The safe storage challenge is different in the digital age. You don’t solve this one with guards and guns – although vaults are a common thread. Xapo claim to solve the secure storage of Bitcoin in three ways:

  • Cryptographic. This includes Multi-Sig, which is pretty much standard best practice these days (like an escrow deal in the analog world). They also offer something called “private key segmentation”. This is best practice in the custodian business. It simply means that the assets are held in a separate account in your name and the custodian does not have access. If I own IBM stock at BNY Mellon, there is no risk of losing it if BNY goes under or decides to steal it.
  • Physical. The vaults are underground and geographically dispersed and the servers are not connected to the Internet or any kind of network.
  • Jurisdictional. This is what Xapo say:

“The geographic dispersion of the Vaults is designed to protect assets from being seized by any government entity. If one government figures out a way to bypass our physical and cryptographic layers of security in one jurisdiction, the other Vault locations would remain uncompromised.”

There is another aspect to jurisdictional that explains why Xapo moved from Silicon Valley to Zurich, Switzerland a few weeks ago. As this article in Bitcoin Magazine explains:

“Though not explicitly stated in the announcement, it seems evident that Xapo needs to protect its key customers from the possibility that the political climate in the United States might become unfriendly to crypto-currencies, and therefore decided to move to a country with strong privacy and banking secrecy traditions. The linked page “Why Switzerland?” is more explicit:

“Switzerland has a long tradition of protecting both personal and financial privacy. The fundamental right to personal privacy is established as part of Article 13 of the Swiss Federal Constitution, and the protection of personal financial information is still maintained today by the provisions of the Swiss Banking Law of 1934.”

The jurisdictional issue addresses the fact that in some countries, Butch Cassidy is seen as the Government. If you had money taken from your bank account in Cyprus, you will have empathy for this view.

In some respects, Xapo is an old-fashioned branded financial institution. This is not the trustless decentralized ideal that many Bitcoin enthusiasts aspire to.

Which is another reason why Xapo moved to Switzerland – the great concentration of wealth managers. These conservative risk-averse clients prefer an old-fashioned branded institution where a) they can do their due diligence and b) where they have somebody to hold accountable if things go wrong. The “trust the math not the institution” mantra of Bitcoin true believers is a bridge too far for most wealth managers.

Bitcoin is an asset that you use to protect against inflation – like gold. Both gold and bitcoin have their fervent fans and they disagree about which is better, but the objective is the same – protection against inflation. One big difference is that it costs money to store gold. You can do this yourself in a safe or the old fashioned hole in the ground or you can outsource storage to a professional. For example from a firm that will store your gold:

“Our vault fees range from just 0.12% to 0.18% per annum (gold). Fees are deducted monthly from your Holding and are only charged when you own gold, silver, platinum or palladium. Storage fees include comprehensive insurance cover.”

Here is what Xapo charge for all that secure storage:


In both cases – Gold and Bitcoin – there is DIY option. You can buy a safe and put your gold bars in there. You can printout your Bitcoins or put them on a hard drive and put those in the safe.

The service offered by Xapo is simply a convenience. If you own a lot of Bitcoin, Xapo’s proposition makes sense.

I think Xapo did charge at one time early in their short history (they were only founded in March 2014) but in January 2015, they announced a free service.

So how will Xapo monetize? Xapo do charge fees for the Debit Card service, but it is hard to conceive this as a primary monetization model.

The usual social media story – monetize through advertising – won’t work in this market. The clients value privacy and that is a big part of Xapo’s pitch. I imagine wealth managers want to know how Xapo will make money. If you get a free service you are the product and wealth managers don’t want to be sold to advertisers.

The only conceivable monetization is lending against the collateral of Bitcoins stored in Xapo vaults. This will appeal to Wealth Managers and their clients, but will only work if the Bitcoin price remains fairly stable.

Whether Bitcoin is a good investment is unclear.

Bitcoin competes with other inflation resistant assets such as gold, property, dividend paying stocks etc. Xapo only has to capture a small % of this investable wealth for the company to be successful. The top tier investors backing Xapo clearly think this is possible.

That is where Xapo, like any Bitcoin startup, is dependent on the overall health of Bitcoin ecosystem. There are three use cases for Bitcoin:

  1. Inflation resistant asset (Xapo’s focus)
  1. Currency to buy and sell stuff.
  1. Payment rail.

In a human ecology analogy, that is like brain, heart and gut. You need all three to function well to be healthy.

If use cases # 2 or 3 fail, use case # 1 will probably also fail. That is why we use the ecosystem and health analogies. If your heart fails, your very healthy brain won’t help you or vice versa.

In future posts we will be looking at the statistics that indicate the health of the Bitcoin ecosystem.

TL:DR. If Bitcoin thrives, Xapo will do well.


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