JPMorgan Chase’s recent decision to allow trading and wealth management clients to use crypto Exchange Traded Funds (ETFs) as collateral for loans is a concerning development that introduces multiple layers of risk. This move, starting with BlackRock’s iShares Bitcoin Trust, integrates a volatile and complex asset class into traditional lending practices, which will have significant negative consequences.
Custody and Ownership Concerns: “Not Your Keys, Not Your Crypto”
A primary concern with crypto ETFs is the nature of ownership and custody.
Lack of Direct Ownership: When investing in a crypto ETF, individuals do not own the underlying cryptocurrency directly (Investopedia). Instead, they own shares of a fund that holds the crypto. This means investors cannot take custody of their share of the crypto assets; they can only trade the ETF shares.
Reliance on Custodians: Crypto ETFs depend on custodians to safeguard the underlying digital assets. This reliance introduces significant risks:
Single Point of Failure: Crypto ETFs rely on custodians, such as Coinbase, which holds a significant percentage of Bitcoin for these ETFs. This concentration is concerning, as any major operational issue, security breach, or insolvency at the custodians will have disastrous consequences for the ETFs and their investors.
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