Coinbase’s Position in Bitcoin ETF Sparks Admiration and Concerns
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“The Launch of US Spot-Bitcoin ETFs Positions Coinbase Global Inc. at the Nexus of Crypto’s Milestone Moment, Bringing Both Admiration and Risks”

The recent introduction of US spot-Bitcoin exchange-traded funds (ETFs) has propelled Coinbase Global Inc. into a pivotal role within the cryptocurrency’s most significant foray into mainstream finance. However, what may appear as an advantageous position also exposes the company and its partners to a complex array of risks.

Last week, the US Securities and Exchange Commission granted approval to nearly a dozen investment firms, including industry giants like BlackRock Inc. and Franklin Templeton, to launch the first ETFs directly investing in Bitcoin. These ETF launches, a culmination of years of industry advocacy, are hailed as a transformative development that is expected to fuel broader adoption of the world’s largest cryptocurrency.

The majority of these ETF issuers will rely on Coinbase for various aspects of their fund operations, as the digital asset exchange is slated to provide custodial, trading, and lending services to BlackRock and other key players.

While Coinbase stands to benefit from Bitcoin’s integration into traditional markets, the arrangement underscores concerns about a potential concentration of risk. Simultaneously, the emergence of numerous funds offering cost-effective fees on Bitcoin investment vehicles poses a distinct threat to revenue at Coinbase’s primary trading platform.

David Schwed, Chief Operating Officer at Halborn, a blockchain security firm, expressed concerns about the concentration of roles, stating, “When you have one entity that’s responsible for the entire life-cycle of the trade, I think that causes concerns.”

The SEC itself is wary of Coinbase’s multifaceted roles, as evidenced by the legal dispute with the company over allegations of operating an unregistered exchange, broker-dealer, and clearinghouse for securities tokens. Coinbase disputes these allegations, contending that the SEC is overstepping its authority.

SEC Chair Gary Gensler, in announcing the ETF approvals, emphasized that the agency does not endorse the funds’ arrangements and does not approve or endorse crypto trading platforms or intermediaries.

Despite being the world’s largest crypto custodian, Coinbase’s concentration as the preferred choice of custody provider for Bitcoin ETFs raises concerns among issuers. Risk disclosures indicate the potential for Coinbase to restrict or curtail certain services, adding a layer of uncertainty.

Dave Abner, Principal at Dabner Capital Partners, expressed concerns about concentration risk, stating, “Even if that turns out not to be a problem for the SEC, to me it seems like an unnecessary risk for investors, and I’m surprised that a multi-custodian setup isn’t required of issuers, just to protect against unforeseen problems.”

Alesia Haas, Coinbase’s Chief Financial Officer, assured that the company diligently works to avoid conflicts of interest, emphasizing that the market structure in traditional securities may not seamlessly translate to the crypto space. Coinbase maintains that its custody business is not at issue in the SEC case.

Currently serving as the sole trading agent for BlackRock, Coinbase is pivotal to the ETF’s operations, managing Bitcoin transactions through Coinbase Prime. Additionally, Coinbase’s lending business plays a crucial role, allowing issuers like BlackRock to borrow Bitcoin or cash for short-term trades. However, concerns are raised about the potential bottleneck in trades due to the financing capacity being sourced from Coinbase’s balance sheet. Despite this, BlackRock has multiple avenues to manage trades, even in scenarios where financing may be unavailable.

“Brett Tejpaul, Coinbase Institutional’s head, emphasized that Coinbase provides integrated services in custody, trading, and financing, ensuring a seamless process. He noted that clients using different providers may introduce additional risks.

Despite Coinbase’s shares experiencing a nearly 400% surge last year in tandem with Bitcoin’s rise, the introduction of new ETFs is projected to contribute only 5% to 10% to the company’s revenue, according to analysts at Mizuho. The estimated impact includes around $25 million to $30 million in custody fees and up to $210 million in incremental Bitcoin trading revenue. This figure, however, represents a fraction of Coinbase’s total revenue, which reached $2.15 billion in the nine months ending Sept. 30.

The arrival of Bitcoin ETFs could lead some existing customers to prefer ETFs over Coinbase for purchasing Bitcoin due to lower trading fees. Mizuho’s senior fintech analyst, Dan Dolev, anticipates that the competitive landscape, driven by low ETF asset-management fees, may lead to fee compression across the entire sector, affecting Coinbase.

Coinbase’s CFO, Alesia Haas, does not foresee immediate trading-fee pressure post-Bitcoin ETF launch, but acknowledges the potential for long-term fee compression. Greg Tusar, Coinbase’s head of institutional products, believes that spot ETFs will be additive to the crypto market and Coinbase.

While custody fees are lower than trading fees, increasing competition in the custody business may drive fees down further. Fidelity Investments and Gemini are among the alternatives to Coinbase, with Fidelity safeguarding Bitcoin for its ETF and Gemini securing VanEck Bitcoin Trust as a client.

As ETFs aim to reduce reliance on a single custodian, they may diversify over time. Haas anticipates this trend and acknowledges that issuers may opt for secondary custodians for redundancy and diversification as assets grow. Despite the tradition of multiple custodians in traditional financial markets, Haas expects Coinbase to retain a significant share of assets.

Being a public company, Coinbase’s heightened scrutiny could be advantageous, potentially attracting more business in the long term, according to Matt Hougan, Chief Investment Officer at Bitwise. Finance professor Campbell Harvey at Duke University noted that customers want the same comfort and confidence trading on Coinbase as they would on established platforms like Nasdaq.

Currently savoring their moment of victory, Coinbase’s New York office witnessed a buoyant atmosphere as Bitcoin ETFs made their debut. Emilie Choi, Coinbase’s Chief Operating Officer, expressed excitement, saying, “None of us slept.” The sustainability of this excitement, however, remains uncertain.”


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