papers/lux-institutional-custody/sections/11-cost-analysis.tex

\section{Cost Analysis}

\label{sec:cost}
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This section gives a transparent, line-itemised cost model for the
custody architecture at \$8B AUM. Where vendor pricing is published
the figure is cited; where pricing is enterprise-confidential the
figure is given as an industry-typical estimate with the
"estimated" caveat.

\subsection{One-Time Capital Costs}

\begin{table}[h]
\centering
\small
\begin{tabular}{lr}
\toprule
\textbf{Item} & \textbf{Cost (USD)} \\
\midrule
Thales Luna 7 HSM ($\mathbf{c}_1$, HA pair, PED tokens) & 38{,}000 \\
Utimaco SR-Se200 Gen2 HSM ($\mathbf{c}_2$, single + spare) & 50{,}000 \\
YubiHSM 2 (vault inventory: 4 units) & 2{,}600 \\
Faraday-shielded SCIF setup (one-time) & 80{,}000 \\
DR-site physical infrastructure & 60{,}000 \\
Vault rental (3 jurisdictions, 5-year prepayment) & 50{,}000 \\
\textbf{Total capex} & \textbf{280{,}600} \\
\bottomrule
\end{tabular}
\caption{One-time capital costs.}
\label{tab:capex}
\end{table}

\subsection{One-Time Ceremony Costs}

\begin{table}[h]
\centering
\small
\begin{tabular}{lr}
\toprule
\textbf{Item} & \textbf{Cost (USD)} \\
\midrule
Cold-tier DKG ceremony, witnessed (KPMG/Deloitte/Mazars) & 200{,}000 \\
Warm-tier DKG ceremony, witnessed & 80{,}000 \\
Hot-tier DKG ceremony (no external witness) & 20{,}000 \\
\textbf{Total first-year ceremony} & \textbf{300{,}000} \\
\bottomrule
\end{tabular}
\caption{First-year ceremony costs.}
\label{tab:ceremony-cost}
\end{table}

\subsection{Recurring Operational Costs (Annual)}

\begin{table}[h]
\centering
\small
\begin{tabular}{lr}
\toprule
\textbf{Item} & \textbf{Cost (USD/year)} \\
\midrule
AWS CloudHSM (cold $\mathbf{c}_3$, two regions) & 50{,}000 \\
GCP Cloud HSM (cold $\mathbf{c}_4$, two regions) & 18{,}000 \\
AWS CloudHSM (warm $\mathbf{w}_1$, single region) & 25{,}000 \\
GCP Cloud HSM (warm $\mathbf{w}_2$, single region) & 12{,}000 \\
Azure Dedicated HSM (warm $\mathbf{w}_3$) & 33{,}000 \\
AWS KMS + GCP KMS (hot tier) & 5{,}000 \\
Lux MPC nodes (5 nodes @ \$2k/mo) & 120{,}000 \\
Tier IV DC for on-prem HSMs (HQ + DR) & 80{,}000 \\
Vault rental (annualised) & 12{,}000 \\
\textbf{Subtotal: HSM + infrastructure} & \textbf{355{,}000} \\
\midrule
Custody operations team (6 engineers, fully loaded) & 1{,}800{,}000 \\
Custody approvers (4 part-time, 50\%) & 600{,}000 \\
Custody Lead + deputy & 600{,}000 \\
\textbf{Subtotal: personnel} & \textbf{3{,}000{,}000} \\
\midrule
SOC 2 Type II annual audit & 150{,}000 \\
ISO 27001 surveillance audit & 35{,}000 \\
CCSS Level 3 audit (annual) & 60{,}000 \\
Ceremony refresh witnessing (annual cold + quarterly warm) & 75{,}000 \\
Crime-and-specie insurance premium (estimated) & 1{,}600{,}000 \\
Chainalysis / TRM screening subscriptions & 80{,}000 \\
\textbf{Subtotal: assurance and insurance} & \textbf{2{,}000{,}000} \\
\midrule
\textbf{Annual recurring total} & \textbf{5{,}355{,}000} \\
\bottomrule
\end{tabular}
\caption{Annual recurring operational costs.}
\label{tab:opex}
\end{table}

\subsection{Year-One and Steady-State}

\begin{itemize}[nosep]
\item \textbf{Year 1 total.} Capex (\$280k) + first-year ceremony
(\$300k) + annual recurring (\$5.36M) = approximately \textbf{\$5.94M}.
\item \textbf{Steady state (Year 2+).} Approximately \textbf{\$5.36M}
per year.
\end{itemize}

\subsection{Cost in Basis Points of AUM}

Against \$8B AUM, the steady-state operational cost is \$5.36M /
\$8{,}000M = 0.067\%, i.e.\ \textbf{6.7 basis points}. Against
typical institutional-custody charges of \textbf{5--12 basis points}
from incumbent custodians, this places the in-house architecture at
the low end of the band even before accounting for the qualitative
benefit of self-custody (no counterparty risk, no rehypothecation
risk).

If the insurance premium is excluded (some funds self-insure or
cap their tower at a lower limit), the operational cost falls to
\$3.76M/year, or \textbf{4.7 bps}. We do not recommend self-insuring
at this AUM tier; the figure is for comparison only.

\subsection{Comparison to Incumbent Custodians}

\begin{table}[h]
\centering
\small
\begin{tabular}{p{3.5cm}p{3.5cm}p{3.5cm}p{4cm}}
\toprule
\textbf{Custodian} & \textbf{Stated fee} & \textbf{Effective on \$8B} &
\textbf{Notes} \\
\midrule
BitGo &
$\sim$0.10\% AUM/yr (estimated) &
\$8M/yr &
SOC 2 Type II; \$250M insurance ceiling \cite{bitgo-soc} \\
Fireblocks (subscription + per-tx) &
\$0.5M--\$2M/yr platform + tx fees &
\$3M--\$5M/yr (estimated) &
Not a fiduciary; technology + fund operates own custody \cite{fireblocks} \\
Anchorage Digital &
$\sim$0.40\% AUM/yr (estimated) &
\$32M/yr &
OCC national trust; full fiduciary \cite{anchorage} \\
Coinbase Custody &
$\sim$0.50\% AUM/yr (estimated) &
\$40M/yr &
NYDFS trust; segregated cold storage \cite{coinbase-custody} \\
\textbf{In-house (this paper)} &
6.7 bps all-in &
\$5.36M/yr &
Self-fiduciary; full control of policy \\
\bottomrule
\end{tabular}
\caption{Cost comparison to incumbent custodians at \$8B AUM. All
incumbent figures are estimated from public-rate-card disclosures
and 2024-vintage industry surveys; institutional negotiations
typically reduce these by 30--50\%.}
\label{tab:cost-compare}
\end{table}

\subsection{Recommended Charge to End Investors}

For a fund operating this architecture as a service to its end
investors, the recommendation is to bake \textbf{1.5--2 bps} of AUM
into the management fee as the operational custody charge. That
recovers the operational cost (6.7 bps) only partially; the balance
is absorbed by the management-fee economics of the fund. The
qualitative outcome is that end investors pay a fraction of what
they would pay an incumbent custodian, with materially better
self-custody properties.

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