Distinguishing Between Spot Bitcoin ETF Custody and Exchange Custody: Exploring the Difference
Mitchell Nixon
Should Coinbase face bankruptcy, Ophelia Snyder, co-founder of 21Shares and 21.co, assures that the underlying Bitcoin in spot Bitcoin ETFs will remain segregated.
With 10 U.S. asset managers engaging in the trading of spot Bitcoin exchange-traded funds (ETFs) worth billions, investors may question the safety measures employed to secure the underlying asset.
Although cryptocurrency exchanges have experienced relatively fewer losses to hacks due to enhanced security measures, notable multimillion-dollar attacks on platforms like Poloniex occurred in 2023. Is there a factor that enhances the safety of trading through a spot Bitcoin ETF compared to utilising an exchange such as Poloniex for retail users?
According to Ophelia Snyder, co-founder of 21Shares and its parent company, 21.co, the Bitcoin custody products utilised by spot Bitcoin ETF providers differ significantly from what retail users access on crypto exchanges.
Snyder explained, “We’re using Coinbase as a custodian for a U.S. product. Me putting money on Coinbase as Ophelia Snyder and me putting money on Coinbase as 21Shares, the products are structurally different.”
21Shares, actively involved in issuing spot Bitcoin ETFs in the U.S., collaborates with ARK Invest on the ARK Invest and 21Shares spot Bitcoin ETF (ARKB) and is a major global crypto ETP provider based in Europe. Unlike retail users on exchanges, spot Bitcoin ETFs by ARK and 21Shares utilise strictly segregated accounts, in contrast to the common practice of pooling assets in omnibus accounts on trading platforms like Coinbase. Snyder emphasised this distinction, stating:
“Our money goes into a specific wallet that belongs to us. In our case, actually multiple wallets, because we don’t want to have a single attack surface. That way, we actually split across multiple wallets.”
Snyder highlighted that 21Shares enhances security for its European products by diversifying across custodians.
From a bankruptcy standpoint, a spot Bitcoin ETF is considerably safer, Snyder emphasised. In the event of 21Shares ceasing operations, a trustee mechanism allows for asset recovery directly from Coinbase. Even if Coinbase faces bankruptcy, Snyder assured that the assets would remain separate, avoiding commingling.
In further fortifying the security of its Bitcoin ETF, 21Shares employs multiple authorisation steps. Snyder explained that no single individual within the organisation can independently move these assets. This heightened security involves dividing the private key into multiple parts, stored in geographically dispersed vaults.
During a session on X Spaces (formerly Twitter Spaces) on Jan. 10, Snyder noted that 21Shares has rigorously tested its custodial implementation for five years. Stressing the unique nature of Bitcoin, she emphasised that Bitcoin ETF providers must store their Bitcoin offline in wallets that have never been connected to the internet.
On January 10, 2024, the much-anticipated approval of the first spot Bitcoin ETF in the U.S. finally materialised, leading to the commencement of trading for the initial BTC ETFs the following day. Upon launch, eight out of the ten spot Bitcoin ETF providers opted for Coinbase custody as their institutional solution, while others, such as Fidelity Investments, chose to rely on their in-house custody solution, Fidelity Digital Asset Services.
VanEck, another Bitcoin ETF issuer, took a different approach by entrusting the custody of the underlying BTC to Gemini, a cryptocurrency trading platform co-founded by Cameron and Tyler Winklevoss. It’s noteworthy that the Winklevoss twins were the inaugural applicants for a spot Bitcoin ETF with the U.S. Securities and Exchange Commission in July 2013, as reported earlier.