The dominance of Coinbase as the custodian for eight out of the 11 approved Bitcoin Exchange-Traded Funds (ETFs) is raising concerns within the blockchain and ETF sectors. Beyond custodianship, Coinbase provides a comprehensive suite of services, including trading and lending, to major players such as BlackRock. This concentration of responsibilities in a single entity has sparked worries among experts, with the SEC expressing reservations about the risk concentration associated with Coinbase’s custodianship of major ETFs.
The SEC’s legal confrontation with Coinbase, alleging that the platform operates as an unregistered exchange and broker-dealer, has added complexity to the situation. David Schwed, COO at Halborn, a blockchain security firm, has raised concerns about the consolidation of responsibilities within Coinbase, stating that traditional financial market infrastructure is typically segmented to avoid such concentration. Schwed argues that having one entity handle all aspects of a trade’s lifecycle could pose potential problems.
The concentration risk stemming from ETF issuers relying heavily on Coinbase’s services has also been highlighted. Dave Abner, Principal at Dabner Capital Partners, an ETF consultancy, expressed surprise that issuers are not required to use multiple custodians as a safeguard against potential risks.
In response to these concerns, Coinbase CFO Alesia Haas emphasized the company’s efforts to mitigate conflicts of interest. Haas clarified that Coinbase’s custody business is not implicated in the ongoing SEC case.
One critical aspect of Coinbase’s role is its exclusive partnership with BlackRock, serving as the sole trading agent for its Bitcoin ETF through Coinbase Prime. Additionally, Coinbase’s lending service, though a smaller organizational segment, plays a vital role in the Bitcoin ETF mechanism, allowing issuers like BlackRock to borrow Bitcoin or cash on a short-term basis for trading. The concentration of Coinbase’s involvement across multiple aspects of ETF operations is prompting a closer examination of potential risks and the need for diversified custody arrangements.
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