Coinbase Acquires Xapo

According to industry reports, the world’s most trusted cryptocurrency exchange platform, Coinbase, has acquired Xapo’s institutional business for $55 million, and now holds approximately 5% of Bitcoin’s circulating supply. Negotiating since May 2019, Coinbase and Xapo finally sealed the deal in August. This acquisition has escalated Coinbase’s ‘Assets Under Custody (AUC)’ mark to over $ 7 billion making it the world’s largest crypto custodian in the span of one year.

The leading exchange announced this in a blog that went live on August 15, 2019. The news follows rapid growth on the part of Coinbase’s year-old custodial wing, which only two months ago reported assets under custody (AUC) valued at $1.3 billion.

Xapo is a global Fintech company, founded in 2013 and built on Bitcoin & blockchain technology. Xapo stores digital assets for users and safeguards them with its security techniques. Xapo is set to continue running its retail crypto exchange but sold its custody business to Coinbase. Through its Bitcoin wallet, it provides its customers the ability to send, receive, spend and store their money globally.

Most of Xapo’s biggest clients have already decided to move their crypto assets to Coinbase, which will now store more than half a million Bitcoin for Xapo’s customers. Post acquisition, Coinbase plans to explore new ways to monetize and leverage crypto assets such as staking, borrowing against crypto portfolios and lending crypto to trusted counterparties, in addition to its custody services.

In just over one year since launch, Coinbase Custody has grown to more than 120 clients in 14 different countries, making it the largest, most globally recognized , and most trusted institutional custodian in the world. The exchange has come a long way since 2012 when Coinbase users were allowed to buy and sell BTC using a bank transfer. This helped propel Coinbase as one of the biggest BTC providers next to Mt. Gox.

The founders participated in a Y Combinator startup incubator which received $5 million from Fred Wilson on May 2013, and $25 million from Andreessen Horowitz, Union Square Ventures (USV), and Ribbit Capital in December 2013. The cryptocurrency community really took notice of how large Coinbase had grown when, in February 2016, Brian Armstrong told the public that Coinbase now stores about 10% of all Bitcoin in circulation.

Coinbase has around 800 employees and the firm has made roughly ten acquisitions since 2012. The company acquired startups like Blockr, Earn.com, Cipher, Digital Wealth, Keystone Capital, Blockspring, and now Xapo’s institutional arm. Xapo started its business like Coinbase, but did not offer its bitcoin wallet and cold storage vault services until March 2014. Over the last two years, Xapo has made around $4.2 million in revenue annually. Additionally, Xapo’s vault in Switzerland has made speculators believe the company’s institutional vault still has a massive amount of digital wealth under its wing.

Coinbase’s acquisition of Xapo raises serious concerns on the purpose of cryptocurrencies. What happens if someday one entity becomes the custodial of all 21 Million Bitcoins? Are we recreating the same broken financial system? Some answer yes. The solution to this is holding a major of crypto in noncustodial wallets and solutions. If this doesn’t happen then we may start depending on a third party entity to process transactions, just like any traditional bank. Bitcoin then just becomes an over leveraged asset class, like Gold ETF.

What are your thoughts on this acquisition?