BlackRock, the largest asset manager in the world, is making moves to change its Bitcoin ETF (IBIT). Since launching on January 11, IBIT has outperformed its peers. This growing interest in Bitcoin ETFs shows that institutional investors are eager to get involved, expanding Bitcoin's reach beyond just retail traders.

On September 16, BlackRock filed a request with the U.S. Securities and Exchange Commission (SEC). They want Bitcoin withdrawals from Coinbase, which acts as the custodian for IBIT, to be processed within 12 hours. The filing states, “Subject to confirmation of the foregoing required minimum balance, Coinbase Custody shall process a withdrawal of Digital Assets from the Custodial Account to a public blockchain address within 12 hours of obtaining an Instruction from Client or Client’s Authorized Representatives.”

This request comes amid concerns from investors about Coinbase's custodial practices for Bitcoin ETFs. Investors are asking Coinbase to provide on-chain proof of Bitcoin purchases for ETFs to ensure everything is transparent. These worries have grown because Bitcoin's price has been stagnant for the past three months, even with significant inflows into Bitcoin ETFs. Some speculate that Coinbase might be using “paper BTC” or Bitcoin IOUs for ETF issuers, which could be affecting the price movement.

In response to these concerns, Coinbase CEO Brian Armstrong stepped in to reassure everyone. He stated, “All ETF mints and burns we process are ultimately settled onchain. Institutional clients have trade financing and OTC options before trades are settled onchain. This is the norm for all our institutional clients. All funds are settled in our Prime vaults (onchain) within about one business day.”

Justin Sun, the founder of Tron, initially raised these concerns. He questioned Coinbase's Bitcoin wrapper, cbBTC, and criticized the exchange for not having proof of reserves. He warned that this could lead to “dark days for Bitcoin.”

BlackRock's recent changes to its Bitcoin ETF aim to address these investor concerns. The modifications show that the asset manager is committed to improving its operational processes and liquidity. ETF analyst Eric Balchunas also downplayed the speculation. He said, “I get why these theories exist and people want to scapegoat the ETFs. Because it is too unthinkable that the native HODLers could be the sellers. But they are… All the ETFs and BlackRock have done is save BTC’s price from the abyss repeatedly.”

Since the launch of Bitcoin ETFs on January 11, inflows have been substantial. According to Dune data, BlackRock’s IBIT holds over 38% of the market share and manages $22.5 billion in on-chain assets.

Coinbase plays a crucial role in the crypto spot ETF market. It provides custody services for eight of the eleven Bitcoin ETFs and eight of the nine Ethereum ETFs. They also offer trading execution and market surveillance services. Currently, Coinbase manages about 90% of the $37 billion in Bitcoin ETF assets. This concentration raises concerns about its position as a potential single point of failure. Fox Business reporter Eleanor Terrett recently pointed this out, saying, “It doesn’t bode well that nearly all crypto ETF issuers have the same custodian for all their BTC and ETH. This makes Coinbase a potential single point of failure and that’s scary.”

Along with worries about possible IOUs to investors, there’s also the threat from North Korean hackers. This puts Coinbase in a vulnerable position if they choose to target the custodian. Despite these challenges, Coinbase remains a key player in institutional Bitcoin investment, handling a significant portion of the U.S.-based BTC spot trading market.