Is Coinbase too big to fail? There’s no doubt that ETFs rely on it every day.
Wall Street spent two years selling a clean vision of Bitcoin to investors. It is a regulated exchange-traded fund, cleared and settled through the same institutional mechanisms that handle stocks and bonds, and is stripped of the Wild West baggage that dogged the early chapters of cryptocurrencies.
The pitch worked beautifully, raising tens of billions of dollars for a wrapper around an asset class familiar to advisors and compliance departments alike.
But what the industry never talks about is the extent to which the entire device goes through a single company.
Morgan Stanley launched Morgan Stanley Bitcoin Trust (NYSE Arca: MSBT) on April 8, becoming the first US bank-affiliated asset manager to offer a crypto ETP. The fund debuted with a first-day trading volume of about $34 million, a fee of 14 basis points, 11 basis points below BlackRock’s dominant iShares Bitcoin Trust, and Coinbase and BNY were selected as custody providers.
The competitive aspect here is clear, but more obvious is the structural one. Yet another blue-chip institution is joining the same custodial backbone that already underpins the vast majority of the U.S. Bitcoin ETF market.
As of April 8, the U.S. Bitcoin ETF complex tracked by Bitbo had $91.71 billion in total assets under management (AUM). Funds that name Coinbase as their custodian or primary custodian in their launch documents account for approximately $77.1 billion of that total, or 84.1 percent of the total market.
This cap spans some of the largest and most liquid stocks in the space, including BlackRock’s IBIT at $55.7 billion, Grayscale’s ETF at $14.67 billion, Bitwise’s BITB at $2.67 billion, ARK’s ARKB at $2.59 billion, and several smaller funds including BRRR, EZBC, BTCO, and BTCW.
Even with a more stringent approach that excludes funds with multi-custodian arrangements and undisclosed allocation splits, the yield would be approximately $74.06 billion (80.8%). Anyway, his concentration is amazing.
This warning should be treated with caution, as the difference between a dominant chokepoint and a literal monopoly is the difference between serious structural concerns and misleading headlines.
BlackRock’s IBIT prospectus names Coinbase as the Bitcoin custodian, but also discloses Anchorage as an additional available custodian, noting that there are no current plans to move assets there. ARK 21Shares’ ARKB filing lists Coinbase alongside BitGo and Anchorage. CoinShares Valkyrie’s BRRR names Coinbase, BitGo, and Komainu, but does not reveal the allocation between them. Fidelity is self-custodial through its digital asset subsidiary, and VanEck uses Gemini.
While there are notable exceptions to the market, the complex remains overwhelmingly weighted toward one provider.
How the path of least resistance became the only path
Too many issuers continue to go to the same vendors for complex structural reasons, even though each has access to sophisticated legal and operational teams.
Coinbase is a regulated qualified custodian under the New York Trust Regulations, with a compliance profile that would satisfy even the most conservative institutional gatekeepers. When the SEC approved the Spot Bitcoin ETF in January 2024, the operational infrastructure required by ETF issuers was already in place, making it the easiest option in a compressed launch timeline where multiple issuers compete to bring to market within days.
After that, the first-mover advantage in ETF storage became self-reinforcing. Once the largest issuers selected Coinbase, authorized participants, market makers, legal advisors, and boards of directors evaluating subsequent launches became comfortable repeating the same template rather than introducing new variables into new product structures.
The Office of the Comptroller of the Currency’s conditional approval of Coinbase’s National Trust Charter, announced on April 2, will solidify the company’s position in the market.
The final charter will allow the company to operate as a federally regulated digital asset manager under a single OCC supervisor, replacing the patchwork of state licenses that currently govern its operations.
Greg Tusar, vice president of institutional products at Coinbase, said the company already holds more than 80% of the world’s crypto ETFs. Complete OCC approval would establish Coinbase as the default crypto back-office infrastructure for institutions that need federal-level regulatory reassurance before deploying capital, further widening the gap between it and all of its competitors assembling state-based licenses.
Whether this concentration reflects true market selection or an undercapacitated market where options were too limited, too new, or too politically complex during an ETF’s critical launch period is a question the industry has not honestly answered.
A small number of issuers have begun disclosing their backup custodians, suggesting at least some awareness, even if those disclosures have not yet led to a meaningful redistribution of actual BTC holdings.
Coinbase has $77 billion worth of related vulnerabilities
The structure of an ETF is designed to segregate fund assets from the sponsor’s balance sheet, and the custodial agreement imposes fiduciary duties and segregation requirements.
Morgan Stanley’s own filings describe separation protocols and insurance coverage for assets under custody. These protections are important and ensure that the concentration risk in this market is significantly different from the simultaneous catastrophes that defined the crypto explosion we are all familiar with.
The danger here is more subtle and in some ways harder to deal with because it passes through the operational layer.
If a dominant custodian experiences a technology outage, settlement bottleneck, or regulatory shock, the impact could ripple across multiple ETF issuers simultaneously, impacting the creation and redemption processes of funds that collectively hold a large portion of the market’s assets. The ETF disclosure document itself reiterates the importance of the custodian to funds under management and the consequences if the custodian resigns or becomes unavailable.
With so many funds sharing the same dependencies, a single enforcement action or licensing dispute at Coinbase can easily become a market-wide event. The reach of any disruption grows with the assets Coinbase handles, which currently exceed $74 billion at the most conservative count.
There is also the reliability aspect worth considering. The institutional credibility story that the ETF industry has built around Bitcoin hinges on whether these products perform as smoothly and predictably as other exchange-traded funds. A disruption to the company’s custodial system, which supports more than four-fifths of the market, would test that promise in a way that could take years to repair, regardless of whether investors’ assets are ultimately made whole.
Fidelity’s self-custody decision, Van Eck’s use of Gemini, and BlackRock’s disclosure of Anchorage as a viable alternative all suggest that tools for diversification exist.
But will the industry use them before the crisis?
(Tag translation) Bitcoin
