The Coinbase / Gemini Project: Issuers, Custodians, and Market Makers of Spot Bitcoin Exchange-Traded Funds
There are a small group of service providers that issuers of spotbitcoin exchange traded funds will share. Between them, crypto exchanges Coinbase and Gemini will provide custody services for practically all the new ETFs. Only four multinational financial service firms have joined as APs to date.
On January 10, after a farcical false start, the US Securities and Exchange Commission approved the launch of spot bitcoin exchange-traded funds (ETFs) in the country. The ETFs will be issued by a selection of big-name financial institutions—including BlackRock, Fidelity, and Franklin Templeton—and will give people a way to invest in bitcoin through a brokerage, as if it were a stock. The price of the ETF shares will follow the price of bitcoin.
In their 2008 white paper, bitcoin’s pseudonymous inventor, Satoshi Nakamoto, outlined a vision for electronic cash that changes hands directly from person to person, under the control of no financial institution. It was part of Wall Street’s plan to make money. Some of the biggest financial institutions in the US will be issuing the ETFs. Nor do investors own or keep any actual bitcoin; they are buying a representation. ETF investors may stand to “benefit from the financial upside, but will not attain all the benefits that Satoshi envisioned,” says Peter McCormack, host of podcast What Bitcoin Did. “The true ownership of bitcoin entails direct possession.”
The ETF issuers will take a management fee, as a percentage of the sum people invest. Onelayer deeper, another subset of companies that provide plumbing necessary for a spotbitcoin exchange to function stand to make a lot. These firms are responsible for storing bitcoin on behalf of the issuers, as appointed custodians, or creating new ETF shares and cashing in existing ones, in the case of authorized participants, or APs. The job of another set of third parties, market makers, is to help price ETFs accurately and ensure that trades run smoothly in the public market.
The pool of firms that perform these trading-related functions is limited, says James Seyffart, ETF research analyst at Bloomberg Intelligence, partly because of the amount of cash required to deal with large quantities of assets flowing in and out the door. There are different technical rails than regular shares in bitcoins, which is why it is difficult to see how willing and qualified candidates can be in custody. A whole different area according to Seyffart.
Bitcoin devotees are declaring a historic victory after US regulators approved a new, more accessible way for people to invest in the crypto asset after a decade of resistance. They won’t go near it on their own.
The attitude of crypto businesses, particularly those that support the ETFs with services, is that an increase in the profile and mainstream acceptance of crypto, in whatever form, will be beneficial to the long-term health of the industry after a long series of reputational setbacks.
The ETFs will have a “mosquito effect,” says Max Keiser, who advises the government of El Salvador on bitcoin policy, “carrying the mind-virus of bitcoin far and wide.”