"If all the owners of 21Shares were to disappear tomorrow, there is a mechanism to use a trustee to directly retrieve these assets from Coinbase."

Author: Helen Partz, Cointelegraph

Translation: Song Xue, Golden Finance

As 10 asset management companies in the United States begin trading billions of dollars in spot Bitcoin exchange-traded funds (ETFs), investors may wonder how these issuers ensure the security of their products' underlying assets.

Despite the continuous improvement in security, cryptocurrency exchanges have lost relatively little funds due to hacking attacks in the past few years. However, the community witnessed attacks on exchanges such as Poloniex, resulting in millions of dollars in losses in 2023. What makes spot Bitcoin ETFs safer than trading on exchanges like Poloniex?

Ophelia Snyder, co-founder of 21Shares and its parent company 21.co, stated that the Bitcoin custody products used by spot Bitcoin ETF providers are "completely different from the products retail investors obtain on cryptocurrency exchanges."

"We use Coinbase as the custodian for our U.S. products. I invest in Coinbase on behalf of Ophelia Snyder, and I invest in Coinbase on behalf of 21Shares. These two products are structurally different," the executive said in an interview at the beginning of January.

21Shares is one of the companies involved in issuing spot Bitcoin ETFs in the United States and has collaborated with ARK Invest to issue the ARK Invest and 21Shares spot Bitcoin ETF (ARKB). 21.co and 21Shares are headquartered in Europe and also operate a large number of cryptocurrency exchange-traded products (ETPs) in the region, making them one of the largest cryptocurrency ETP providers globally.

When individuals place assets on exchanges as retail users, trading platforms like Coinbase typically aggregate customer assets in a comprehensive account, where assets such as Bitcoin are pooled together without strict segregation. "It's there with everyone else's money," Snyder pointed out when discussing such trading accounts, adding that the spot Bitcoin ETFs of ARK and 21Shares use strictly segregated accounts. She said:

"Our funds go into our own specific wallets. In fact, it's multiple wallets because we don't want a single attack surface. This way, we actually distribute the money across multiple wallets."

Snyder mentioned that for their European products, 21Shares also achieves diversification through custodians to provide better security.

Snyder stated that spot Bitcoin ETFs are "safer from a bankruptcy perspective" and added, "If all the owners of 21Shares were to disappear tomorrow, there is a mechanism to use a trustee to directly retrieve these assets from Coinbase." Snyder also added that even if Coinbase were to go bankrupt, there would still be a way to keep these assets separate.

To add another layer of security to Bitcoin ETFs, 21Shares also uses multiple authorization steps. "No one person can actually move these assets within the organization," Snyder said. She mentioned that by splitting the private keys into multiple parts and storing these parts in geographically distributed vaults, this level of security can be achieved.

At the X Spaces event on January 10, Snyder stated that for five years, 21Shares has been testing with custodians. "You can't treat it like any other asset in the world," the executive emphasized. She added that Bitcoin ETF providers must keep their Bitcoin offline in wallets that have never been connected to the internet.

The long-awaited first spot Bitcoin ETF in the United States was approved on January 10, 2024, and began trading the next day. At launch, eight out of ten spot Bitcoin ETF providers rely on Coinbase custody as an institution, while some issuers such as Fidelity Investments have chosen their proprietary custody solution, Fidelity Digital Asset Services.

Another Bitcoin ETF issuer, VanEck, prefers to custody the underlying BTC with Gemini, a cryptocurrency exchange platform co-founded by Cameron and Tyler Winklevoss. As previously reported, Winklevoss became the first applicant for a spot Bitcoin ETF in the history of the U.S. Securities and Exchange Commission as early as July 2013.

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