BITCOIN was supposed to be a frictionless digital currency that required no banks or intermediaries.
Yet a raft of bitcoin thefts at exchanges like Mt.Gox is raising the question of whether the sophisticated currency still needs the same sort of physical security infrastructure — impenetrable steel vaults, armed security guards, and even paper ledgers — as cash and gold.
A Silicon Valley start-up called Xapo is among a handful of young companies trying to become the Fort Knox of bitcoin, building secret bank vaults deep in the earth that would safely store millions of dollars worth of bitcoin code on computer drives. And if modern bank robbers still manage to pry open the vault? Xapo promises to fully insure all deposits.
On Wednesday, Xapo said it raised $US20 million in funding round led by venture-capital firm Benchmark Capital, to support a network of underground vaults that the company says are in mountainous regions on multiple continents.
To break in, would-be robbers would have to face armed security guards, biometric scanners and a 24/7 video surveillance system. The company currently stores bitcoins for roughly 2,000 clients — many of which are hedge funds, family home offices and other financial institutions.
“Trust in the participants, trust in the technology, trust in the ecosystem as a whole — this is a really important block for the bitcoin ecosystem,” said Matt Cohler, a partner at Benchmark Capital, which invested in Xapo alongside Fortress Investment Group and Ribbit Capital.
With Xapo, a customer sends bitcoins by uploading them to a unique address created by Xapo computers that are completely offline. The bitcoins’ private keys, the secret data used to send funds, are encrypted and stored on physical hard drives and on paper, which are then placed in Xapo’s vaults.
When a customer wants to transfer funds from the vault to their “wallet, ” an authorised Xapo employee must first confirm the transaction by taking several steps to verify the identity of the user. The, once a day, these authorised employees descend into the vault to fetch the private keys to execute the transactions. According to the company, the code is secured in such a way that it is “mathematically unfeasible” for a third party to read it. Transactions are completed in 24 hours or less.
Unlike credit-card transactions, bitcoins aren’t safeguarded by consumer protections, so if they are stolen, no laws or intermediary firms can help recover the losses. Xapo says its vaults are backed by an insurance company, to protect against physical theft or malfeasance by Xapo’s employees. It doesn’t, however, protect against user recklessness, such as sharing their password with other people.
Xapo’s Vault product charges a 0.12 per cent annual fee for each deposit. Its “Wallet” product, which allows people to send or accept bitcoins, doesn’t charge any fees for transactions.
Other companies are trying to provide similar services. Coinbase, for example, one of the largest bitcoin exchanges, stores as much as 97 per cent of customer information offline, according to its website. The San Francisco company also stores sensitive information on servers that are completely untethered to the internet. But Coinbase doesn’t fully insure users against losses. Elliptic Enterprises Ltd., a British company, offers a bitcoin vault that is insured by Lloyd’s of London.
Whether these depositories completely impenetrable by hackers remains to be seen, but the companies say they are a necessity after the shutdown of several bitcoin exchanges. Last month, one of the largest, Mt.Gox in Tokyo, lost nearly half a billion dollars of bitcoin after a hacking attack, fanning fears that other exchanges could be vulnerable to attack. A few days later, Canadian exchange Flexcoin said it was shutting down after hackers stole hundreds of thousands of dollars in bitcoins.
The attacks have rattled the nascent industry. After hitting a peak price of more than $1,100 in November, the value of bitcoin is now hovering around $600.
“Bitcoin today is like the internet before the browser — it was very hard to use,” said Wences Casares, the 40-year-old founder and chief executive of Xapo, which has been working on its vaults for two years.
“The first problem is ease of use — it’s not user friendly enough — and second, is security-service providers have lost bitcoin in one way or another.”
For Mr Casares, born to Patagonian sheep ranchers in Argentina, the campaign to secure bitcoin is as much personal as it is professional. His country has long been racked by dramatic fluctuations of its currency, the Argentine peso. “My family had lost everything, several times, from inflation, to devaluation and confiscation,” he said.
Mr. Casares has devoted most of his career to creating financial products. He developed Patagon, one of Argentina’s first online financial services firm, which was acquired by Banco Santander for $US750 million. He also founded Banco Lemon, a Brazilian bank for the underbanked, which was later sold to Banco de Brasil, and more recently Lemon.com, an online wallet, that was acquired this past December.