The paramount importance of custody continues to find itself at the forefront of news in the digital asset space. On September 12th, ARK21 Shares announced that they would be diversifying their roster of custodians for their spot Bitcoin ETF.

ARK 21Shares Bitcoin ETF is a partnership between Cathie Wood’s ARK Invest and 21Shares. Trading under the ticker symbol “ARKB,” ARK 21Shares is the fourth largest spot Bitcoin ETF (behind only BlackRock, Grayscale, and Fidelity) with assets under management (AUM) approaching $3B according to the Blockworks Bitcoin ETF Tracker.

The first and only federally chartered crypto bank in the United States, Anchorage Digital, as well as crypto custodian BitGo will join ARK 21Shares’ current custodian, Coinbase Inc.

Anchorage maintains a legally required segregation of assets regulated by the Office of the Comptroller of the Currency. This shielding of assets is designed to offer protection from the bankruptcy dangers and failure of crypto firms in the past. Anchorage has also said it’s using industry-leading security and novel technology (including biometric authentication and offline private-key storage).

Trading of approved spot Bitcoin ETFs began earlier this year, and the inflows have been massive. Custody in the Bitcoin ETF space to this point has been dominated by Coinbase. Aside from Fidelity (who self-custodies) and VanEck (uses Gemini), all other players in the space currently utilize Coinbase Inc.

This move isn’t the first of its kind, as Valkyrie added BitGo in February as an additional custodian for its Valkyrie Bitcoin Fund (BRRR). Valkyrie also uses Coinbase Inc.

ARK 21Shares does not intend to disclose the specific allocation of bitcoin holdings among the three custodians at this time. They also retain the discretion to adjust such allocations at any time without notice to the ETF’s shareholders.

What They’re Saying

Andres Valencia, head of investment management at 21Shares, shared in a statement, “21Shares is thrilled to be working with Anchorage Digital Bank and BitGo to diversify our custodians for our U.S. spot ETPs. We consider our custody partners to be crucial to the risk management and operational excellence of our product lineup, and diversification adds to the safety and security of our offering.”

Note: ETP stands for exchange traded products, which is the wider universe that includes ETFs.

Nathan McCauley, Anchorage Digital’s co-founder and CEO shared, “Anchorage Digital Bank N.A. is pleased to further broaden access to crypto as a custodian selected for 21Shares’ U.S. spot ETF lineup. Our federal charter — which supersedes state-by-state regulation and positions us as a qualified custodian — makes us a natural choice for ETF custody diversification.”

BitGo CEO Mike Belshe celebrated the multi-custodial approach that ARK 21Shares is taking in a statement, also highlighting that BitGo offers “100% cold storage.”

What This Could Mean Moving Forward

Diversifying custody may help reduce the risk that any one custodian has a cyber attack, goes bankrupt, or experiences any one of a number of potential issues that would put customers at risk.

Crossover Capital expects that we’ll see more moves like this from other bitcoin ETFs, as companies look to differentiate on security rather than, let’s say, cost.

Stay Informed on the Latest News in the Digital Asset Industry

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Investment advisory services offered through Crossover Capital Brands, LLC (dba Crossover Capital), a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

This material is intended for informational purposes only. It should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third party sources, and is believed to be reliable.

Alternative investments – such as hedge funds and private equity/venture capital funds – are speculative and involve a high degree of risk. Likewise, the emergence of digital assets comes with its own speculative characteristics and involves a high degree of risk. Various digital assets have unique features, and the regulatory risk environment continues to change as governance requirements, rules, and lawsuits emerge. There may be material differences in the type of marketplaces available for digital assets, and there could be significant restrictions or limitations on withdrawing from or transferring these types of investments. Digital assets may incur higher fees when compared to traditional assets, and these expenses may offset returns.

Risks Related to Custodial Processes of Digital Assets
The risks relating to the custody of digital assets include appropriate arrangements for which defined best practices and industry standards are not yet fully defined and the manner in which Crossover Capital interprets such rules and practices, may differ from interpretation from other regulatory agencies. For the purposes of digital asset custody, clients should be aware that custodians is not in physical possession of bitcoin or digital assets but they continue to use such phrasing of custody and storage, as they would with other traditional assets types such as equity and fixed income products, but such phrasing may be at odds with how the Securities and Exchange Commission (“SEC”) defines custody, which in turn poses an unknown regulatory risk to clients. Custodians often hold client assets in physical or electronic form, typically charging fees for the secure, safe keeping of such assets represent a relatively new asset class which few state and federal legal frameworks directly address. As such, there is uncertainty as to how to attach and perfect a security interest over digital assets. A client’s claim over such assets could be unsecured, increasing a risk of loss in the event of default.

Crossover Capital has limited knowledge of what capital requirements, reporting or system requirements that custodians must abide by and cannot independently verify such representations. Further, clients should be aware that despite the custodial efforts in place, wallets have been hacked and digital assets have been stolen. This is a significant risk for anyone investing in digital assets which cannot be completely protected against. There is a heightened risk of unauthorized withdrawals or theft of digital assets than there is with traditional asset classes as once a digital asset is removed from an account, it is more difficult to retrieve.

Crossover Capital may not be able to independently verify digital asset valuations provided by institutions that hold or offer digital asset services. As a result, Crossover Capital will generally rely on information reported to it by third parties. As such, the information contained herein is for informational purposes. Clients should recognize that they may bear digital asset-based fees and expenses at the manager-level, as well as indirect fees, expenses, and performance-based compensation for digital assets. Spot bitcoin exchange-traded products were recently approved for listing and trading by the SEC. However, such approvals do not indicate SEC approval to use or invest in bitcoin. Clients should remain cautious and aware of the various risks associated with digital assets that have a value tied to bitcoin or other crypto related products.