In traditional finance, leveraging Bitcoin requires sophisticated custody solutions.
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Bitcoin has come a long way from the fringes of finance to its current status as a mainstream investment asset. The rise of Bitcoin exchange-traded products (ETPs) and ETFs has made it easier than ever for institutional investors to gain exposure to Bitcoin. But as billions of dollars flow into these products, serious questions are emerging that require closer scrutiny. That means relying on a single custodian for the physical Bitcoin that backs the product.
For example, consider BlackRock’s iShares Bitcoin Trust. As of this writing, it has over $50 billion in assets under management, making it the most successful Bitcoin ETF on the market. However, all Bitcoins held in that fund are held solely by Coinbase.
BlackRock is a financial giant, but in fact, in addition to BlackRock, Coinbase is also a significant source of counterparty risk for investors. This single point of failure exposes the fund to the risk of catastrophic loss, which few investors seem to be aware of.
What happens if the custodian fails?
The potential effects of this arrangement are clearly set forth in iShares Bitcoin Trust’s SEC registration statement.
“…in the event of bankruptcy or insolvency of the Bitcoin Custodian…customer assets, including assets of the Trust, will be considered property of the Bitcoin Custodian, and the Customer, including the Trust, may be exposed to risks such as: be treated as a general unsecured creditor of such entity and be exposed to the risk of total loss or reduction in value of such assets.”
More simply, if Coinbase were to declare bankruptcy, holders of iShares Bitcoin ETF units would find themselves at the back of the line, with no guaranteed claim to the Bitcoins backing their shares. may be treated as an unsecured creditor.
Coinbase’s credit rating is BB– by S&P Global Ratings, which puts it in “junk” status. That’s right. The company trusted to hold billions of dollars worth of physical Bitcoin has a less-than-stellar credit rating.
As of this writing, there is no reason to question Coinbase’s ability to continue storing Bitcoin on behalf of its customers. But before you dismiss this scenario as unlikely, remember that Bitcoin’s history is littered with examples of custodian collapses, from Mt.Gox to FTX to Prime Trust.
Problems with the single custodian model
The single custodian model is a holdover from traditional finance, where assets are often pooled with a single clearinghouse or bank. But Bitcoin is fundamentally different. Because it does not require a central administrator, relying on one undermines the very principles that make Bitcoin valuable: minimizing trust and being resilient to central points of failure.
Single custodian failure can occur for a variety of reasons. In addition to bankruptcy and fraud, there are risks such as state attacks, cyberattacks, and business failures. When these events occur, the asset may become inaccessible, even if the Bitcoin itself is still visible on the blockchain. In a market that values speed, security, and autonomy, many institutional investors consider this an unacceptable risk.
Multi-Agency Protection: A Primer
This is the problem that multi-agency protection (MIC) solves. MIC uses Bitcoin’s native multi-signature technology to distribute custody across multiple independent institutions in different jurisdictions.
Rather than one institution holding all the keys in a multi-signature quorum, the MIC distributes keys to multiple regulated administrators. This means that a single custodian cannot approve a transaction on its own, as a quorum of keys (for example, 2 out of 3) is required to move funds. Even if one custodian goes bankrupt or is compromised, depositors’ Bitcoins remain safe and accessible.
MIC minimizes the risk of coordinated asset freezes and seizures by combining custodians in different countries and independent regulatory regimes. This decentralized approach mitigates many, if not all, of the risks associated with Bitcoin custodians and is a more robust custody solution for institutional-scale investments than the solutions most frequently used today.
Why multi-facility custody is the future
The demand for secure and scalable Bitcoin storage has never been greater. As ETFs, ETPs, corporate bonds, and strategic reserves gain momentum, institutional investors will need solutions that address the risks posed by a single custodian. Bitcoin service providers such as Onramp offer multi-institutional custodial frameworks that integrate the best elements of traditional security protocols with the resiliency of Bitcoin’s decentralized architecture.
Security is not the only benefit of MIC. By involving multiple custodians, financial institutions diversify their exposure and reduce the risk of catastrophic losses due to a single point of failure. Multisig setups provide cryptographic proof of reserves and require multiple parties to approve transactions, increasing oversight and accountability. Institutions can customize their custodial structure to meet governance and compliance requirements, and add or replace custodians as needed.
Bitcoin ETF and Bitcoin Trust
One of the reasons trust structures are enjoying renewed interest is the ability to take advantage of MICs while increasing tax efficiency. Unlike ETFs, which generally require cash settlement, trusts can facilitate physical delivery. This means that investors receive the underlying Bitcoin itself, rather than fiat cash. This eliminates taxable events and preserves the long-term benefits of holding Bitcoin directly.
For pension funds, endowments, and family offices seeking direct exposure to Bitcoin without introducing additional counterparty risk, MIC-enabled trusts represent an attractive alternative. By combining the ease of use of traditional financial products with the security of decentralized storage, these structures offer financial institutions a more efficient and resilient way to gain Bitcoin exposure.
Turning point for Bitcoin products for institutional investors
The launch of the Spot Bitcoin ETF was a milestone for the industry, but as the market matures, the limitations of the single custodian model are becoming harder to ignore. Just as traditional finance developed multi-custodian clearinghouses and diversified asset management frameworks, new Bitcoin financial products will need to be created to meet the needs of the growing number of institutional investors. As markets adapt to the opportunities presented by Bitcoin technology, institutions that provide security, transparency, and decentralization will be best positioned to succeed.
