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Coinbase finds itself at the center of a brewing storm as it acts as the custodian for eight out of the 11 approved Bitcoin ETFs.
While this role extends beyond custody to include trading and lending functions for major players like BlackRock, concerns are mounting among blockchain specialists and ETF consultants about the risks associated with such a high concentration of responsibilities within a single platform.
SEC Raises Eyebrows, and Legal Confrontation Ensues
The Securities and Exchange Commission (SEC) has not turned a blind eye to this concentration, expressing reservations about the potential risks created by Coinbase's custodianship of the majority of significant ETFs. A legal clash has ensued, with the SEC accusing Coinbase of operating as an unregistered exchange and broker-dealer—a charge vehemently denied by the digital asset exchange.
In a recent conversation with Bloomberg, David Schwed, Chief Operating Officer at Halborn, a blockchain security firm, voiced his concerns. According to Crypto News, Schwed emphasized that traditional financial market infrastructure is designed to distribute responsibilities across distinct roles to avoid the pitfalls of concentration. Entrusting a single entity like Coinbase with all aspects of a trade's lifecycle, according to Schwed, could pose significant challenges.
Concentration Risk and Lack of Mandates
Industry experts highlight the concentration risk posed by ETF issuers relying heavily on Coinbase's services. Dave Abner, a principal at Dabner Capital Partners, an ETF consultancy, expressed surprise that issuers are not mandated to use multiple custodians to safeguard against potential risks.
In response to mounting concerns, Coinbase's Chief Financial Officer, Alesia Haas, asserted the company's commitment to mitigating conflicts of interest. She clarified that the ongoing SEC case does not implicate the company's custody business.
Exclusive Partnership and Lending Dynamics
According to Bloomberg, a crucial aspect of Coinbase's role is its exclusive partnership with BlackRock as the sole trading agent for its Bitcoin ETF, operating through Coinbase Prime.
Coinbase's lending service, though a smaller organizational segment, plays a vital role in the Bitcoin ETF mechanism, enabling issuers like BlackRock to borrow Bitcoin or cash on a short-term basis for trading. As the regulatory scrutiny intensifies, the cryptocurrency community watches closely to see how this concentration dilemma unfolds.
Photo: Kanchanara/Unsplash
