Executives at Coinbase recently held a company ‘AMA’ (Ask Me Anything) call to address increasing scrutiny surrounding Bitcoin exchange-traded funds (ETFs) and to defend the firm's significant role as a custodian. During the call, Coinbase leadership pushed back against assertions that spot Bitcoin ETFs are backed by “paper Bitcoin” rather than real, underlying assets, clarifying the robust mechanisms in place to ensure asset security and verification.

Coinbase CEO Brian Armstrong responded to a query regarding the company's market dominance in U.S.-listed Bitcoin ETF custody. He estimated Coinbase’s share at over 80%, framing this high concentration as a competitive strength rather than a risk. Armstrong highlighted Coinbase's position as a trusted counterparty on the institutional side, emphasizing their advanced capabilities in this area and the lucrative nature of the business. While acknowledging concerns about concentration risk, he noted that larger ETFs typically diversify custodians as their assets grow, a process he views as both healthy and beneficial for the market, although Coinbase maintains its dominant share.

Security of Coinbase’s custody infrastructure was a key point of discussion. Armstrong detailed their reliance on advanced cold storage systems that undergo regular penetration testing and audits. He also mentioned that Coinbase holds patents for its custody technology and employs cryptographers to enhance defenses against potential attacks. Furthermore, large financial institutions and government clients conduct their own independent audits of Coinbase's systems, underscoring the rigorous security protocols.

Addressing the social media sentiment that Bitcoin ETFs might not be fully backed by real Bitcoin, Armstrong expressed confusion about the origin of these concerns, reiterating that spot Bitcoin ETFs are legally required to be entirely backed by the underlying asset. Coinbase CFO Alesia Haas expanded on this, explaining that critics often demand public “proof of reserves,” such as the disclosure of on-chain wallet addresses linked to ETF holdings. Haas clarified that Coinbase does not disclose client wallet addresses due to paramount security and confidentiality reasons. However, she stressed that ETF issuers and their custody clients possess the capability to independently verify their assets on-chain.

Haas further explained that the custody business is 'separately audited,' with Coinbase producing SOC 1 and SOC 2 reports. These reports attest to the effective operation of internal controls, reconcile holdings back to the blockchain, and confirm that client assets, including those of ETF issuers, are segregated. Each custody client can view their assets on-chain and is aware of the addresses associated with their holdings. While Coinbase will not disclose addresses on behalf of clients, Haas suggested the possibility of developing tools to enable clients to disclose their own proof of reserves if they choose to do so.

Later in the call, Armstrong and Haas also addressed regulatory developments concerning Coinbase’s stance on proposed U.S. crypto market structure legislation, frequently referred to as the CLARITY Act. Armstrong refuted claims that Coinbase had withdrawn its support for the bill. He clarified that the company objected to a specific draft that it deemed unworkable. Coinbase has invested more than $100 million over several years in advocating for regulatory clarity, with Armstrong arguing that earlier drafts made concessions to traditional financial trade groups that could potentially stifle crypto innovation. He indicated that negotiations are ongoing, with continued engagement from lawmakers, regulators, and industry participants. Armstrong expressed confidence that a market structure bill would eventually pass, emphasizing that statutory clarity would offer long-term certainty beyond the shifting leadership at agencies like the SEC. Should legislation stall, he affirmed that Coinbase would continue to operate under existing rules while pursuing clarity through regulators or the courts, concluding that the bill’s passage is in everyone’s best interest.