A bitcoiners' narrow bank, everywhere but here
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A longtime bitcoin custodian has evolved over the years into becoming much like a sort of financial institution that's been denied to U.S. citizens: a narrow bank.
Why it matters: Xapo doesn't describe itself as such, but it offers a glimpse of the type of services that entrepreneurs have been pushing in the U.S. for years — banks designed to be nearly riskless.
Be smart: A narrow bank does not engage in lending, which entails some risk. It focuses on providing financial services (such as saving and checking) to its customers.
- The idea is to make the safest possible access point to the traditional financial system. The typical model is to provide savings accounts, park all the money at the Fed and split the interest earned on those deposits between customers and the bank.
How it works: Xapo was founded in 2014 as a safe place to stick your bitcoin. These days, customers can also store a few other cryptocurrencies and even dollars there.
- Bitcoin earns a variable rate of 1%. Dollars earn a variable rate of 4.1%. As a bitcoin-oriented company, it pays all its interest in bitcoin (in satoshis, the smallest unit of a bitcoin), but a user can swap any of that into dollars.
- Customers can also buy their bitcoin (or ether and etc.) on the app from a counterparty that's not trying to make a big return on the spread.
Zoom in: It offers that 4.1% rate of return by buying U.S. treasuries and passing most of the interest earned on to depositors.
- Bitcoin is secured by 30,000 BTC that the company holds on its own balance sheet.
- BTC interest is paid off interest the company earns putting its own bitcoin to work in various ways — not customers'.
Zoom out: Xapo exited the U.S. market in 2021 and has no plans at the moment to come back.
- "If you focus on the U.S. it's very difficult to focus on anything else," Seamus Rocca, Xapo's CEO, tells Axios. "We focus on the rest of the world, serving them from Gibraltar."
- For years now, its top countries have included Argentina, the United Kingdom, Mexico, Brazil, and South Africa.
- Rocca estimates it has a half-billion dollars worth of deposits now.
What they're saying: Xapo is taking a contrarian position in the crypto world, expressly dissenting from the "not your keys, not your coins" mantra of so many crypto diehards.
- "The twitter sphere will tell you that self-custody is the way forward," Rocca says. "Our conviction is: that's bad advice."
- "You need somebody who makes it easy for you to keep your bitcoin safe, somebody you can trust."
- Of note: Rocca joined Xapo in 2017 from Standard Chartered, taking over the CEO role in 2021.
Between the lines: Xapo's business model is a simple annual fee (currently $150) for all its services.
- It would take about $4,000 stored on the app in dollars to cover that fee annually.
- Its security model has always been a closely held secret. It used to use giant bunkers, though not anymore.
The intrigue: Various players have wanted to launch narrow banks, but U.S. regulators have yet to permit one (even when a Fed alum tried to open one).
Read more: Bitcoin life insurance company sees beauty in boring.
