A spot Bitcoin ETF is an investment vehicle that allows investors to invest in Bitcoin and its derivatives without directly investing in it. The Securities and Exchange Commission recently approved 11 spot Bitcoin ETF applications on 10th January, 2024. In this manner, a massive amount of institutional investment was redirected to Bitcoin.
At the same time, the product was available to a new market namely traditional investors who will be able to purchase Bitcoin spot ETF shares from centralized exchanges.
What is Bitcoin Spot ETF Custody?
An asset management firm has to acquire a considerable amount of Bitcoin in order to issue Bitcoin spot ETF shares. The value of the shares issued by a Bitcoin spot ETF is based on the value of Bitcoin that is acquired by the issuers.
Since Bitcoin spot ETFs are fully regulated investment vehicles, therefore the issuers comply with the reserve audit and maintenance requirements.
However, Bitcoin spot ETF is a relatively new investment product. Therefore, a vast majority of investors have limited information about the product. Hence, various investors may raise questions regarding the management of the ETF-backing funds.
Speaking on the matter, 21Shares co-founder Ophelia Snyder told Cointelegraph that Bitcoin spot ETF issuers do not use custodial services that are accessible to retail crypto investors. She retained that the forum is using Coinbase as a custodian for a US-based product.
She stated that there is a difference between Coinbase services offered to individual investors and to commercial account holders. Ark Invest and 21Shares spot Bitcoin ETF (ARKB) are two out of 11 firms that have recently listed Bitcoin spot ETFs and the firms are working with each other on making the product more accessible to a wider array of investors in United States.
21Shares is founded by Egyptian entrepreneur and computer engineer Hany Rashwan. He also founded 21.co which operates various cryptocurrency ETPs alongside subsidiary 21Shares.
How does Bitcoin Spot ETF Custody Work?
21Shares CEO, Snyder explained that retail investors can create a verified account on an exchange platform. However, exchanges offer omnibus accounts for individual investors which means that their funds are not strictly segregated from other retail investors and exist in a pooled form.
However, she emphasized that the enterprise accounts of 21Shares and Ark Invest are strictly segregated. She detailed that the funds present in the enterprise accounts are sent to specific wallets that are under the sole ownership of the issuers.
She further stated that rather than storing funds in a single wallet, the funds are stored across multiple wallets dedicated to the issuer. This technique prevents a single point of intervention.
The executive further stated that 21Shares has diversified funds across various custodians for its European products as a way to enhance safety. She also addressed bankruptcy concerns for investors noting that Bitcoin spot ETF funds are extremely secure in that regard.
According to her, 21Shares has appointed a trustee mechanism to recover assets directly from Coinbase in case of any staff changes. On this front, she hypothesized that in case Coinbase undergoes bankruptcy the spot Bitcoin funds will not undergo commingled.
Additionally, 21Shares co-founder stated that the firm has undertaken multiple authorization steps as additional security measure. She stated that the firm has split private keys into various pieces and preserved each unit in vaults situated in different geographical locations.
21Shares has been working on battle testing implementation with various custodial service providers during the last five years. She noted in an X space discussion in January 2024 that you cannot treat spot Bitcoin ETF like any other asset in the world.
She further stated that the Bitcoin spot ETF investors preserve their BTC in offline wallets that have never been online. It is important to note that 8 out of 10, Bitcoin spot ETF providers have appointed Coinbase as custodial services provider.
Conclusion
Bitcoin spot ETF has not only introduced the digital asset to a whole new class of investors but it has also added it to the league of regulated investments. The flow of investment from enterprise investors is likely to bring more innovation and offer better facilities for investors.
