21Shares, a prominent asset manager in the crypto space, is taking proactive measures to enhance the security of its spot crypto exchange-traded funds (ETFs). By diversifying its custodians, 21Shares aims to reduce the risk of a ‘single-point failure’ in its operations. This decision comes amidst growing concerns over cybersecurity threats, particularly from North Korean hackers targeting crypto ETFs.
Strengthening Security with New Custodians
In a recent announcement, 21Shares revealed that it has enlisted the services of Anchorage Digital Bank and BitGo as additional custodians for its ARK 21Shares Bitcoin ETF (ARKB) and the 21Shares Core Ethereum ETF (CETH). These new custodians will work alongside the existing custodian, Coinbase, to bolster the security and reliability of 21Shares’ ETF operations in the US.
The selection of Anchorage Digital Bank and BitGo was based on their strong track records in regulatory compliance and security measures. By diversifying its custodian partners, 21Shares aims to fortify the safety and security of its offerings, minimizing the risk of a ‘single point of failure’ in its operations.
Importance of Custody Partners in Risk Management
Andres Valencia, Head of Investment Management at 21Shares, emphasized the critical role that custody partners play in risk management and operational excellence. He highlighted the importance of diversification in custodial services to enhance the overall security of the ETFs offered by 21Shares.
Anchorage Digital Bank co-founder and CEO, Nathan McCauley, underscored the significance of the firm’s federal charter in qualifying it as an asset custodian. This designation allows Anchorage Digital Bank to operate at a national level, ensuring robust security and regulatory compliance for its clients, including ETF issuers like 21Shares.
BitGo CEO, Mike Belshe, reiterated the company’s commitment to providing top-tier custodial services, including 100% cold storage solutions. With over a decade of experience in the industry, BitGo has earned a reputation as a trusted partner for institutions and ETF issuers alike.
Responding to Cybersecurity Threats
The decision to diversify custodians comes in response to recent warnings from the FBI about North Korea-linked hackers targeting crypto ETFs. This alarming development has raised concerns about the vulnerability of ETFs relying on a single custodian, such as Coinbase, for their operations.
Coinbase currently serves as the primary custodian for eight out of the 11 US spot crypto ETFs, highlighting a concentration of custodial services within the industry. The risks associated with this ‘single point of failure’ have prompted issuers like 21Shares to explore alternative custodial options to mitigate potential security threats.
Nate Geraci, President of The ETF Store, predicted a trend towards custodial diversification among ETF issuers to reduce the risk of being dependent on a single provider. This strategy aims to enhance the resilience of ETF operations and safeguard investors’ assets in the face of evolving cybersecurity challenges.
Eric Balchunas, a senior ETF analyst at Bloomberg, echoed this sentiment, citing the high fees charged by Coinbase to ETF issuers compared to other asset classes. As a result, some issuers may consider switching to more cost-effective custodial alternatives or leverage multiple custodians to negotiate competitive fee structures.
Conclusion
In conclusion, 21Shares’ decision to diversify its custodians reflects a proactive approach to risk management and security enhancement in the crypto ETF space. By partnering with Anchorage Digital Bank and BitGo, 21Shares aims to strengthen the safety and reliability of its ETF offerings, safeguarding investors’ assets against potential cybersecurity threats. This move underscores the growing importance of custodial diversification in mitigating operational risks and ensuring the long-term viability of crypto ETFs in an increasingly volatile market environment.