Investing in Bitcoin spot ETFs – have you ever considered the impact if the underlying Bitcoin holdings were stolen? Especially since Coinbase, currently the custodian for 8 issuers, is involved. Will it compensate for all losses?
Background:
Coinbase’s two major risks in Bitcoin spot ETFs: insufficient holdings and arbitrage trading, leading to increased market volatility.
Table of Contents:
Potential Risks behind Bitcoin Spot ETFs
Will Coinbase Compensate if BTC is Stolen?
$320 Million Commercial Insurance Purchased
Bitcoin is not FDIC Insured
What if Coinbase Goes Bankrupt?
The US Securities and Exchange Commission (SEC) recently approved 11 Bitcoin spot ETFs, with Coinbase, a US-listed cryptocurrency exchange, providing crucial services as the issuer for these ETFs, along with 8 other institutions, including BlackRock and Grayscale, for BTC custody services.
Read More:
Monopolizing cryptocurrency custody, Coinbase may become the ultimate winner in the Bitcoin ETF era.
Potential Risks behind Bitcoin Spot ETFs
We know that every share of a Bitcoin spot ETF needs actual Bitcoin holdings as support. The issuer needs to purchase and redeem Bitcoin according to the popularity of each ETF in order to stabilize the Bitcoin price fluctuations.
However, we also know that Bitcoin, as a digital asset stored on the blockchain, can only be kept in an encrypted wallet, and the corresponding private key is the only tool to transfer these Bitcoins. In the crypto world, there is always a risk of theft for any crypto asset in a wallet, and ETF issuers are no exception. As a regulatory body, the SEC also acknowledges this risk in relevant documents:
Of course, large institutions like Coinbase usually utilize cold wallets and multi-signature mechanisms to enhance security. Coinbase, which has been established for more than a decade, has not experienced any large-scale asset theft incidents. However, the possibility of accidents happening is not zero.
Will Coinbase Compensate if BTC is Stolen?
Coinbase, as the largest custodian for Bitcoin spot ETFs, has taken corresponding measures to address the risk of BTC theft. According to the application documents submitted to the SEC by BlackRock, Coinbase has purchased $320 million in commercial insurance:
It is worth noting that this insurance will be shared among all Coinbase customers. However, in the event of an actual theft, the $320 million insurance amount may not be sufficient considering the current scale of the ETF. Users who have purchased a large amount of spot ETFs may suffer significant losses, while the issuers may not be heavily affected.
[Image Source: BlackRock Application Documents]
Furthermore, this may lead to further tightening of regulations and stricter scrutiny of crypto products by the SEC, which is even more frightening.
Bitcoin is not FDIC Insured
It is also worth mentioning that Bitcoin, as a digital asset, is different from cash or other real-world assets and is not protected by the FDIC (Federal Deposit Insurance Corporation) or SIPC (Securities Investor Protection Corporation):
[Image Source: BlackRock Application Documents]
What if Coinbase Goes Bankrupt?
Another possibility is what would happen if Coinbase goes bankrupt. According to the documents, since custody of digital assets is a historical precedent, the Bitcoin entrusted to Coinbase by institutions may be considered assets lent to Coinbase in the event of bankruptcy. In this case, the ETF issuers would lose all their Bitcoin and suffer a major blow.
Of course, the probability of Coinbase suddenly going bankrupt is not very high. Issuers may switch custodians in advance or use multiple custodians to reduce reliance on a single company. This article is just a warning and reflection on potential risks, hoping to provide readers with a better understanding of how Bitcoin spot ETFs operate.
For more information, you can visit BlackRock’s S-1 application documents submitted to the SEC.
[Image Source: Financial News]
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