BlackRock requests changes to the custody agreement with Coinbase. According to analyst Balchunas, the world’s largest asset management firm is reportedly operating a Bitcoin node.
On September 16, BlackRock submitted a request to the SEC to modify the treatment of bitcoin withdrawals for its Bitcoin spot ETF (IBIT) due to concerns regarding the custody practices of Coinbase, the custodian for IBIT’s assets.
The request specifies that bitcoin withdrawals must be completed within 12 hours of instructions received from clients or their authorized representatives.
Investor concerns
Some investors have expressed concerns about the custody practices adopted by Coinbase, requesting on-chain proof to ensure transparency in bitcoin purchase operations for the ETFs. These concerns stem from the underwhelming performance of Bitcoin’s price over the past three months, despite inflows into the ETFs. Some believe Coinbase has been using “paper BTC” or Bitcoin deposit receipts, which could negatively affect the price.
Coinbase’s response
Brian Armstrong, CEO of Coinbase, stated that all ETF buy and sell transactions are settled on-chain. Armstrong emphasized that institutional clients have commercial financing and over-the-counter (OTC) options before transactions are settled on-chain, which occurs within one business day.
Coinbase plays a significant role in the market for spot ETFs on digital assets, providing custody services for eight of the eleven Bitcoin ETFs and eight of the nine Ethereum ETFs. The company manages approximately 90% of the $37 billion in assets held in Bitcoin ETFs, raising concerns about the risk of centralization and exposure to potential hacker attacks.
Expert analysis
Eric Balchunas, an ETF analyst for Bloomberg, stated that the speculation regarding Coinbase’s practices is understandable, but added that the ETFs and BlackRock have supported Bitcoin’s price in recent months. Additionally, according to the analyst’s posts on X, BlackRock reportedly operates its own Bitcoin node and verifies the Bitcoin balances of their addresses on Coinbase Prime every night, ensuring that the bitcoins held by the IBIT fund are properly validated. This information would be available only to institutional clients upon request and would not be published to avoid spam. Balchunas stated:
“This is not amateur hour, BlackRock has like 500 ETFs which store the holdings w custodians and has been doing this for decades w out a hitch.”
According to Fox Business journalist Eleanor Terrett, the risks associated with relying on nearly all crypto ETF issuers with the same custodian make Coinbase a potential critical point of failure. After BlackRock, other ETF issuers may modify their custody agreements to reduce risks.
