Coinbase may become the biggest winner behind the Bitcoin ETF race, why is that?

Original Title: Coinbase Is the Real Winner in the Bitcoin ETF Race---Here's Why

Author: Nicholas Morgan, Decrypt

Compiled by: bayemon.eth, ChainCatcher

The Bitcoin ETF race is underway, with Wall Street giants like BlackRock and Fidelity vying for the title of the "first" to offer a spot market product. However, the eventual winner will share this honor with the partner that helped it cross the finish line.

That partner is likely to be Coinbase.

On June 15, BlackRock announced it would partner with Coinbase to launch its own spot Bitcoin ETF product. The $8.5 trillion asset management company identified the San Francisco-based cryptocurrency exchange Coinbase as the custodian for the Bitcoin fund and subsequently amended its filing to state that Coinbase would also provide monitoring services, allowing both parties to share information about transactions, clearing activities, and customer identities to reduce the risk of market manipulation.

Bob Ras, co-founder of asset tokenization company Sologenic, stated, "In this regard, Coinbase may become the preferred exchange. It is clear that the big players view Coinbase as a legitimate and extremely important institution."

BlackRock is not the only Bitcoin ETF applicant seeking help from Coinbase. All five spot ETF Bitcoin applicants working with the Chicago exchanges—Fidelity, VanEck, 21Shares under Ark Invest, Valkyrie, and Invesco—have submitted revised applications designating Coinbase as their partner.

Shortly after the SEC filed a lawsuit against Coinbase, accusing it of trading unregistered securities and engaging in unregistered securities trading through its monitoring service Coinbase Earn, Coinbase established partnerships with multiple institutions. While Coinbase previously deemed the SEC's accusations unfounded, the lawsuit undoubtedly cast a shadow over Coinbase.

However, BlackRock and other institutions seem to have disregarded the SEC's allegations, with trust votes appearing to favor believing in Coinbase and continuing to pursue relevant collaborations. According to industry insiders, while it remains unclear what specific impact the SEC's allegations will have on Coinbase's recent trading, even if the allegations are true, they do not seem to affect Coinbase's ability and influence in issuing ETF products.

Joshua Frank, CEO of digital asset information service The Tie, stated that in recent years, Coinbase has been more cautious in its operations than some of its peers, which has "caused quite a bit of trouble," and the ETF trading indicates that Coinbase's more cautious approach is paying off.

Frank also mentioned, "I have 200 institutional clients, many of whom are traditional financial firms, and every institution I have interacted with is eager to partner with Coinbase."

This confidence from the industry has, to some extent, contributed to Coinbase's recent stock price surge. After BlackRock submitted its filing, Coinbase's stock price began to steadily rise from $54 per share, and when a federal judge made a favorable ruling in the SEC's lawsuit against Ripple, determining that its XRP token is not a security in certain transactions, Coinbase's stock price soared to $107 on July 13. As of the time of publication, the stock closed at around $98 per share, still above the price when the SEC sued Coinbase on June 6.

As more TradFi companies express interest in deeply engaging with cryptocurrencies, this trust factor is also crucial. Jeffrey Blockinger, chief legal officer of decentralized exchange Vertex Protocol, believes that contacts in traditional finance have expressed interest in Bitcoin, but they often "have no interest" in understanding the technical aspects of digital assets.

This "trust" has become even more important following the FTX bankruptcy incident, where U.S. authorities charged SBF's crypto exchange FTX with misappropriating customer and company funds, while Coinbase faced multiple criminal charges. The SEC also mentioned in its June 5 lawsuit against Binance that Binance was also accused of misappropriating customer funds.

Regarding the issue of misappropriation of funds, Coinbase stated that it would strive to maintain a complete separation between customer funds and company funds. Coinbase's Chief Legal Officer Paul Grewal previously supported legislative bodies in drafting relevant legal documents in the cryptocurrency space to properly delineate the boundaries between customers and the company.

Blockinger noted that if BlackRock, Fidelity, or other TradFi giants with large due diligence teams believe their clients' assets are at risk, they are unlikely to engage in transactions with Coinbase.

However, it is worth noting that BlackRock had invested $24 million in the now-defunct FTX. Despite the enthusiasm surrounding Coinbase following Ripple's recent favorable ruling and the authorization of ETF trading, it cannot be denied that even though Coinbase has recently seen an upward trend, it remains overshadowed by the SEC.

The rise in Coinbase's stock price is largely attributed to the rebound in Bitcoin prices following ETF trading. According to data from CoinGecko, in an analysis included in BlackRock's ETF filing, Nasdaq estimates that 56% of the $129 billion Bitcoin trading in the U.S. occurs on Coinbase, with BTC/USD being the most traded pair on Coinbase.

Although public sentiment towards Coinbase has been optimistic following the Ripple ruling, analysts at Berenberg Capital Markets caution that it is still too early to celebrate Coinbase's victory, as the SEC's allegations pose fundamental issues for Coinbase's future development.

Unlike Ripple, Coinbase is being sued for providing unregistered securities through its advisory services, which Coinbase has rebutted. However, Berenberg analysts warn that this service, which allows users to earn interest by staking coins on Coinbase, may have exceeded the scope involved in the Ripple ruling.

In a research report dated July 17, Berenberg analysts warned that if the SEC or state regulators restrict Coinbase's normal token staking, it could severely impact its financial situation through trading volume limitations.

Frank from The Tie issued a broader warning for the entire industry, pointing out that even though Coinbase has operated with a trustworthy attitude, the market's reliance on Coinbase as both a cryptocurrency custodian and exchange is extremely unhealthy, especially after the FTX collapse. For the market, developing more participants is healthier than being heavily reliant on any single company.

Frank concluded that ultimately, the market needs more "Coinbases." If we want institutions to be active in the cryptocurrency market, the market's demand is for as many institutions as possible, rather than a single dominant player.