21Shares: How to Ensure Custody Security for Spot Bitcoin ETFs?
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21Shares: How to Ensure Custody Security for Spot Bitcoin ETFs?
"If all the owners of 21Shares disappeared tomorrow, there's a mechanism to directly reclaim these assets from Coinbase using a trustee."
Navigating Web3 tides with focused insightsAuthor: Helen Partz, Cointelegraph
Translation: Songxue, Jinse Finance
As 10 U.S. asset management firms begin trading billions of dollars worth of spot Bitcoin exchange-traded funds (ETFs), investors may wonder how these issuers ensure the underlying assets of their products are kept secure.
Although cryptocurrency exchanges have lost relatively little to hacks in recent years due to improved security, the community witnessed multi-million dollar attacks on exchanges like Poloniex in 2023. What makes spot Bitcoin ETFs safer than trading on exchanges such as Poloniex?
Ophelia Snyder, co-founder of 21Shares and its parent company 21.co, said the Bitcoin custody solutions used by spot Bitcoin ETF providers are "completely different" from those available to retail users on cryptocurrency exchanges.
"We use Coinbase as the custodian for our U.S. products. When I invest with Coinbase under my name, Ophelia Snyder, versus when 21Shares invests with Coinbase, those products are structurally different," the executive said in an interview in early January.
21Shares is one of the companies involved in launching spot Bitcoin ETFs in the United States, partnering with ARK Invest to issue the ARK Invest and 21Shares Spot Bitcoin ETF (ARKB). Headquartered in Europe, 21.co and 21Shares also operate a significant number of cryptocurrency exchange-traded products (ETPs) in the region and are among the world’s largest crypto ETP providers.
When individuals deposit assets on an exchange as retail users, platforms like Coinbase typically hold customer assets in omnibus accounts, where user holdings such as Bitcoin are pooled together without strict segregation. "Your money is there with everyone else's," Snyder noted when discussing such trading accounts, adding that the ARK and 21Shares spot Bitcoin ETF uses strictly segregated accounts. She explained:
"Our funds go into specific wallets that belong exclusively to us. Actually, multiple wallets, because we don’t want a single point of attack. So we actually distribute the funds across multiple wallets."
Snyder mentioned that for its European products, 21Shares further diversifies custodians to enhance security.
Spot Bitcoin ETFs are also "safer from a bankruptcy perspective," said Snyder. "If all of 21Shares’ personnel disappeared tomorrow, there’s a mechanism to use a trustee to directly reclaim those assets from Coinbase," the executive said. She added that even if Coinbase were to go bankrupt, there are ways to ensure these assets remain segregated.
To add another layer of security for Bitcoin ETFs, 21Shares also employs multiple authorization steps. "No single individual can truly transfer these assets within the organization," Snyder said. She explained that this level of security is achieved by splitting private keys into multiple parts and storing those parts in geographically distributed vaults.
During an X Spaces (formerly Twitter Spaces) event on January 10, Snyder said 21Shares has been testing with custodians for five years. "You cannot treat it like any other asset in the world," the executive emphasized, adding that Bitcoin ETF providers must keep their Bitcoin offline in wallets that never connect to the internet.
The long-awaited first spot Bitcoin ETF in the United States was approved on January 10, 2024, with the first BTC ETFs beginning trading the next day. At launch, eight out of ten spot Bitcoin ETF providers relied on Coinbase Custody as their institutional custodian, while some issuers like Fidelity Investments opted for their proprietary custody solution, Fidelity Digital Asset Services.
Another Bitcoin ETF issuer, VanEck, chose to entrust its underlying BTC to Gemini, a cryptocurrency trading platform co-founded by Cameron and Tyler Winklevoss. As previously reported, the Winklevoss twins were among the first applicants ever to file for a spot Bitcoin ETF with the U.S. Securities and Exchange Commission back in July 2013.
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