Coinbase’s Custody Could Be Key For The SEC To Approve (or Not) A Bitcoin ETF

Key facts:
  • BlackRock, Fidelity and other companies request the services of Coinbase.

  • ETF manipulation will require different exchanges based on different countries.

The Coinbase cryptocurrency exchange has become one of the key players in the approval, or not, of spot bitcoin (BTC) exchange-traded funds (ETFs) in the United States.

This is because the American exchange is custodian of bitcoins in many companies that apply for spot ETFs and has the function of monitoring and mitigating bitcoin market manipulation, says research firm Kaiko.

It is worth noting that in June, the financial giant BlackRock submitted an authorization request to the SEC, to launch a spot bitcoin ETF. However, two weeks after the filing, the SEC returned the filings as insufficient because they did not explain how the custody of the underlying asset, bitcoin, could be done.

Because of the rejection, BlackRock made a new request, but added a new actor and that is Coinbase. The exchange will comply with functions of monitoring and custody of bitcoins. After this change, the company’s request continues and is reviewed by the regulator.

Similar changes have been made by Fidelity, WidsomTree, VanEck, Invesco and Ark Investment, companies that also hope to launch a spot bitcoin ETF.

For this reason, Kaiko considers that “manipulating the ETF” will require an entity to do the same in the market place, “larger, in different exchanges based in different countries.”

In addition to Coinbase, the second largest bitcoin and cryptocurrency exchange in the world, after Binance, Nasdaq will also participate in the management, which is a member of the Intermarket Surveillance Group, whose Surveillance has been accepted by many bitcoin futures derivatives in the past.

Despite these arrangements, Kaiko questions whether they are enough to prevent market manipulation.

According to the company, Coinbase has increased its market share during the fastest bitcoin minutesmeaning it had a significant influence on cryptocurrency prices at that time.

The chart below shows that Coinbase has a significant market share in the fastest minutes. On average, the exchange accounted for 50% of the total BTC trading volume in as little as 10 minutes.

Coinbase market share during the fastest bitcoin minutes. Source: Kaiko.

In addition, the exchange often ranks second or third in volume when prices fluctuate the most, indicating that it is an important market for investors.

The approval of the ETF will likely lead to an increase in trading volume on the Coinbase platform.

Based on these arguments, Kaiko determined that it is “hard to imagine” that an entity could manipulate the price of an ETF for a short period of time without trying “to manipulate the price of Coinbase as well.” This is because the exchange is such an important market that any manipulation is likely to “have a significant impact on cryptocurrency prices.”