Concerns arise as Coinbase’s control over custody of Bitcoin ETF becomes more dominant
Coinbase, the popular digital-asset exchange, has become the custodian of eight out of the 11 approved Bitcoin ETFs. This has raised concerns among experts in the blockchain and ETF sectors who question the high concentration of responsibilities on one platform.
Coinbase’s involvement in these ETFs goes beyond just custodianship. The company is set to provide a comprehensive range of services, including custody, trading, and lending functions, to major players like BlackRock. However, this concentration of responsibilities in a single entity has sparked concerns among industry specialists.
The Securities and Exchange Commission (SEC) has also expressed reservations about the risk concentration resulting from Coinbase’s custody of all major ETFs. In fact, the SEC has taken legal action against Coinbase, accusing the company of operating an unregistered exchange and broker-dealer. Coinbase vehemently denies these allegations.
David Schwed, the Chief Operating Officer at Halborn, a blockchain security firm, has voiced concerns over this situation. Schwed believes that the financial market infrastructure is traditionally divided into separate roles to avoid such concentration of responsibilities. He argues that having one entity like Coinbase handle all aspects of a trade’s lifecycle could be problematic.
The reliance of ETF issuers on Coinbase’s services has been flagged as a concentration risk. Dave Abner, a principal at Dabner Capital Partners, an ETF consultancy, has expressed surprise that issuers are not required to use multiple custodians to safeguard against potential risks.
In response to these concerns, Coinbase’s Chief Financial Officer, Alesia Haas, has stated that the company is committed to mitigating conflicts of interest. She also clarified that Coinbase’s custody business is not involved in the ongoing SEC case.
One crucial aspect of Coinbase’s role is its exclusive partnership with BlackRock as the sole trading agent for its Bitcoin ETF. This partnership operates through Coinbase Prime. Additionally, Coinbase’s lending service, although a smaller part of the organization, plays a vital role in the Bitcoin ETF mechanism. It allows issuers like BlackRock to borrow Bitcoin or cash on a short-term basis for trading.
