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Crypto custody market heats up as Coinbase buys Xapo

Financial giants and crypto startups are battling it out for a share of the growing crypto custody industry which promises to boost the market by making this new class of assets available to institutional investors.

Having switched focus to serving institutional clients, US exchange Coinbase has claimed its place at the top with the acquisition of Xapo — the cryptocurrency custody business known for storing the Bitcoin of the super-rich in vaults under the Swiss Alps.

Custody market booms

The deal, worth a cool $55 million, has made Coinbase the largest crypto custodian in the world with around $7 billion worth of crypto assets under management. And according to CEO Brian Armstrong, this number continues to grow as the platform enjoys a steady flow of investment from institutional players:

"Whether institutions were going to adopt crypto or not was an open question about 12 months ago. I think it’s safe to say we now know the answer," tweeted Armstrong after announcing the acquisition. "We’re seeing $200-400M a week in new crypto deposits come in from institutional customers."

Under the Investment Advisers Act of 1940, institutions with $150 million or more in assets must keep them with a regulated custodian. Until recently, this has been a stumbling block preventing institutions from investing in crypto assets.

Coinbase Custody, which is regulated by the New York State Department of Financial Services, plans to use Xapo’s technology and expertise to develop a new set of custody solutions for digital assets. As Coinbase Custody CEO Sam McIngvale told Fortune, the safety deposit box model — which once provided the most secure possible custody method — is rapidly changing. “Moving forward, the next phase of crypto custody is a much broader suite of services serving a much broader set of crypto assets,” said McIngvale.

To accommodate digital assets in a secure way that allows investors to participate in the crypto ecosystem, Coinbase Custody offers staking support, giving holders the ability to vote in assets with democratic governance systems, along with insurance and regulatory support.

With plans for lending and borrowing too, the exchange seems set on morphing into a one-stop-shop for crypto services, with all the services that might typically be associated with a bank.

These services should help Coinbase maintain its lead among a growing number of crypto custodians, all clamoring to offer the most competitive digital vault for emerging institutional investors.

Following the Coinbase Xapo acquisition, it’s estimated that Coinbase will now hold up to 4% of the total supply of Bitcoin (approx 860,000 BTC). Grayscale, one of the largest crypto asset portfolio companies, has approximately $3 billion in assets managed by Coinbase, including approximately 1% of the Bitcoin supply.

Fidelity and Bakkt close behind

The intent of institutions was highlighted in a survey by Fidelity, which found in May that 22 percent of institutional investors already have some exposure to digital assets and that four in ten are open to making future investments in digital assets over the next five years.

“We’ve seen a maturation of interest in digital assets from early adopters, like crypto hedge funds, to traditional institutional investors like family offices and endowments,” said the president of Fidelity Digital Assets Tom Jessop. “More institutional investors are engaging with digital assets, either directly or through service providers."

Fidelity is rumored to have joined Coinbase in a bidding war for Xapo.

Startups in the custody space have proven popular with private investors and strategic buyers positioning themselves to capitalize on the expected investment influx from institutional players.

Andreessen Horowitz-backed startup Anchorage, which offers cryptographic custody biometric-based software of multiple approvals, announced in July that it had received $40 million in backing from legacy finance firm Visa.

Bakkt, which provides a means for Wall Street investors to buy and custody physical bitcoin through a regulated system, finally got the green light to offer bitcoin futures in September following months of regulatory delays. The ICE-backed exchange has acquired several smaller custody firms in the process, including leading crypto asset custodian Digital Asset Custody Company, and parts of Rosenthal Collins Group in a deal designed to streamline the regulatory process.

Elsewhere, smaller firms have also come together to take advantage of each other’s expertise, like BitGo and Alogrand, which have combined multi-signature wallets and custody services to provide fuller support to customers.

This flurry of dealmaking comes as macroeconomic tensions reach a crescendo, and bitcoin begins to display safe-haven appeal. Uncertainty over the US-China trade war, and tensions between Iran and Trump have led investors into traditional safe-haven assets like gold and is likely to have catalyzed demand for non-correlated assets like bitcoin that can help balance out investment portfolios.


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