Offering a Vault And a Wallet, Bitcoin Venture Xapo Prepares Mid-July Debit Card Launch

Bitcoin vault provider Xapo Ltd. is days away from sending debit cards backed by the digital currency to consumers with registered Xapo Bitcoin accounts.

The Palo Alto, Calif.-based startup, which is incorporated in Hong Kong, also raised $20 million in a recent investment round, bringing its total investment bounty to $40 million.

Xapo expects to ship the debit cards beginning the middle of this month, reports TechCrunch.

The debit cards, which can be used at payment terminals inside stores, instantly convert the cardholder’s Bitcoins to the local currency. Merchants receive their funds in that currency. Users pay no fees other than a one-time $15 shipping charge. Merchants pay “all fees just as they for debit and credit cards…,” Xapo says on its Web site. Xapo receives an unspecified share of each payment transaction fee, a Xapo spokeswoman says in an email.

The conversion from Bitcoin to currency is done through the Xapo wallet, Xapo says. “In other words, if I go to the coffee shop and purchase $5 worth of coffee using my Xapo debit card, the merchant will process the payment of $5. Xapo will make sure I have $5 worth of bitcoin in my Xapo Wallet,” the spokeswoman says. “If I do, the transaction will go through, and $5 worth of bitcoin will be deducted from my wallet, while the merchant will be credited with $5. All transactions are done using the rate of bitcoin at the time of purchase.”

This conversion within the wallet is unique, Xapo says in a blog post on its Web site, because other Bitcoin-backed cards may require consumers to make the conversion into the local currency before making a purchase.

The debit cards, at least from appearances on the Xapo Web site, carry no network brand, but the bank identification number appearing on at least one pictured card is one associated with MasterCard Inc. Xapo says it has no deal with any of the card brands, and instead works directly with several banks in the United States and Europe.

“Xapo has relationships with banks in the U.S. and Europe that issue and process the debit cards,” notes a post on the Xapo blog. “The payment network (MasterCard, Visa, etc.) that will be used by the Xapo debit card is not yet determined and will depend on the bank. There is no relationship between Xapo and the payment network; rather there is a relationship between Xapo and the card-issuing banks.”

Xapo’s efforts to broaden consumer use of Bitcoin are vital to increasing the value of the digital currency, says George Peabody, an analyst at payments research firm Glenbrook Partners.

Xapo appears to have a three-pronged approach to accomplishing that, he says. One is the digital wallet, another is the debit card, and the third is securing Bitcoins with its Vault product.

“To make Bitcoin really useful and actually improve its value as an investment, it needs to be used,” Peabody says.

Another component to that utility is the emergence of exchanges that are more mature than the early-stage ones, Peabody says. That entails management of them by businesspeople who care about compliance, who are well funded, and who have skills operating information-technology infrastructures, he says.

That is the case of entrepreneur Timothy Draper, who successful won nearly 30,000 Bitcoins in an auction last week with the intent to start an exchange.

“Xapo has the debit card and that’s one way to do it,” Peabody says. The Bitcoin-backed debit card may not overtake traditional payment cards, he says, because “we don’t see a Bitcoin-backed card solving a problem that needs solving right away.”

Rather, the Xapo debit card, and others that may follow, “gives access to make Bitcoins more liquid, and that’s a good thing,” Peabody says.