As I waited with the rest of the world for the first bitcoin ETF to be approved, one thing has been gnawing at me: With a handful of exceptions including Fidelity and VanEck, nearly every applicant for a spot bitcoin ETF intends to use Coinbase as its custodian.
David Schwed is chief operating officer of Halborn.
As a cybersecurity leader focused on blockchains, this concentration of risk along with the inherently high-risk nature of crypto custodianship and the still-evolving nature of security best practices gives me pause.
It’s not Coinbase itself that worries me here. The firm has never been hit by a known hack, which explains why so many traditional institutions trust its know-how. However, there is no such thing as an unhackable target – anything and anyone can be compromised, given enough time and resources, which is a lesson I’ve learned over a career at the intersection of cybersecurity and asset management.
What worries me is the extreme asset concentration in a single custodian. And given the cash-like nature of crypto assets, that makes the situation inherently concerning.
See also: Gary Gensler’s Bitcoin ETF Clown Show
It may be time to rethink the “qualified custodian” designation, a regulatory sign-off which in its current form doesn’t necessarily ensure risky blockchain-based assets are necessarily (or best) secured. Further, ideally, digital asset custodians should be subject to more oversight by better-trained regulators, under more rigorous state and federal standards, than they are right now.
Most qualified custodians today secure equities, bonds or digitally tracked fiat balances, all of which are fundamentally legal agreements, which can’t simply be “stolen.” But bitcoin [BTC], like cash and gold, is what’s known as a bearer instrument. A successful crypto hack is like a bank robbery in the Wild West, as soon as it’s in the hands of a thief, the money is simply gone.
So for a crypto custodian, one mistake is all it takes for the assets to disappear entirely.
We also know the forces of global crypto-crime are formidable and determined. To pick just one notorious example, North Korea’s Lazarus Group hacking cohort is believed to have stolen $3 billion worth of crypto over the past six years, and it shows no signs of stopping. Inflows to a bitcoin…
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