On Monday, the U.S. Securities and Exchange Commission (SEC) approved nine ethereum spot exchange-traded funds (ETFs). Coinbase, the leading U.S. cryptocurrency exchange, responded enthusiastically on x. It highlighted its integral role as custodian of the vast majority of these new financial products. According to its statement, Coinbase is “proud to be a trusted partner and custodian powering 10 of the 11 btc spot ETFs and 8 of the 9 newly approved eth ETFs.”
Coinbase is a single point of failure
Coinbase’s statement also highlights the transformative potential of spot ETFs, stating that they will “help catalyze further growth and innovation” and “expand the size and breadth of cryptocurrency markets.” However, this significant consolidation of custodial responsibilities by Coinbase has sparked a critical response from some industry experts who are concerned about the implications of such a concentration.
Gabor Gurbacs, founder of PointsVille and strategy advisor at Tether, x.com/gaborgurbacs/status/1815710448651559320″ target=”_blank” rel=”noopener nofollow”>voiced His critique via x. He questioned the sanity of fund issuers’ decision-making processes: “Coinbase holds assets for 10 of the 11 spot bitcoin ETFs and 8 of the 9 eth ETFs. While I’m sure they have a great security team, I fundamentally question the competence and judgment of the fund issuers’ boards and risk management committees who think this is an acceptable risk.”
Gurbacs’ concerns stem from the potential risks associated with such a high concentration of assets under the management of a single entity. He explained: “It’s virtually all the assets in almost every U.S. ETF. What if something goes wrong? As we learned, that’s certainly a possibility in the exchange space. I’ve lost the last shred of confidence that even traditional assets are remotely safe with most issuers. The boards of directors are incompetent.” His comments reflect a broader anxiety about the vulnerability of the crypto ecosystem to single points of failure, a concern that has been highlighted by numerous high-profile exchange hacks and technical glitches in recent years.
To further clarify his position, Gurbacs noted that his criticism did not reflect his opinion of Coinbase’s operational capabilities, but was rather a criticism of the systemic risks posed by such concentration. He stated that “a single entity as a counterparty for the entire space remains an unacceptable risk,” emphasizing the need to diversify custody services to mitigate potential systemic threats.
In response to User x’s query about the uniqueness of Fidelity’s custody solution, Gurbacs confirmed: “Yes,” indicating that Fidelity is the only major player that has established its own custody services for cryptocurrencies.
Steven Dickens, chief technology advisor at The Futurum Group, echoed Gurbacs’ sentiments and added his perspective on the need for regulatory scrutiny: “I agree. Regulators need to assess systemic risks. I’m not saying anything bad about Coinbase, but last week should serve as a warning about the risks of IT concentration alone.”
At the time of writing, eth was trading at $3,499.
Featured image created with DALL·E, chart from TradingView.com
