Wall Street has been promoting a clear vision of Bitcoin to investors, emphasizing a regulated exchange-traded fund (ETF) that offers a safe and familiar framework similar to traditional equities and bonds. This approach has successfully attracted billions into the cryptocurrency market, but it has raised concerns about the heavy reliance on a single entity: Coinbase.
On April 8, Morgan Stanley launched the Morgan Stanley Bitcoin Trust, marking a significant milestone as the first U.S. bank-affiliated asset manager to introduce a cryptocurrency exchange-traded product (ETP). This fund premiered with approximately $34 million in trading volume and has positioned itself as a competitor to leading products like BlackRock’s iShares Bitcoin Trust. However, the emphasis on competition seems overshadowed by the structural reality that most U.S. bitcoin ETFs depend on the same custodial services provided by Coinbase.
As of the launch date, the U.S. bitcoin ETF market managed by Bitbo held around $91.71 billion in total assets. Coinbase was named as the custodian for approximately $77.10 billion of that, making up an astonishing 84.1 percent of the total market. Prominent funds like BlackRock’s IBIT and Grayscale’s ETFs are among those that significantly contribute to this concentration.
While exceptions exist—some funds disclose multiple custodians— the overwhelming reliance on Coinbase raises questions about systemic risk. BlackRock’s prospectus for IBIT does mention alternative custodians, but they remain underutilized. The prevailing concern is whether this situation reflects a true market preference or if it indicates a lack of viable alternatives.
Additionally, Coinbase has taken steps to solidify its leadership in the ETF custody domain, such as obtaining conditional approval from the Office of the Comptroller of the Currency (OCC) for a national trust charter. Should this approval finalize, Coinbase will operate as a federally regulated custodian, streamlining its regulatory obligations and providing further comfort to institutional investors while other operators continue to navigate a complicated state-by-state licensing landscape.
Greg Tusar, Coinbase’s Vice President of Institutional Product, noted the firm’s existing custody of more than 80% of the world’s crypto ETFs. The OCC approval would heighten Coinbase’s standing as the default infrastructure for institutional capital, deepening the dependency on a single provider.
This concentration, however, is not without risks. While ETF structures are designed to safeguard fund assets and ensure they are distinct from the sponsor’s balance sheet, concentration risk remains significant. If Coinbase experiences a technology failure, regulatory challenge, or any major operational disruption, the repercussions could extend across the ETF landscape, impacting asset management for a multitude of funds.
The potential fallout from a custodial disruption at Coinbase challenges the narrative of institutional credibility that the ETF market has worked hard to establish. Such an event could undermine investor confidence and lead to long-term repercussions for the industry, regardless of asset recovery.
Institutions are beginning to explore alternative custodians, as seen with Fidelity’s self-custody approach and VanEck opting for Gemini. However, the pressing question remains: will the crypto industry proactively diversify before an inevitable crisis prompts action? The weight of dependence on a single custodian adds layers of complexity and potential vulnerability that could reshape the regulatory and operational landscape of the burgeoning cryptocurrency market.
