Is Coinbase Issuing ‘Paper Bitcoin’ to ETFs?

Concerned Bitcoin investors are increasingly questioning whether Coinbase, the leading crypto exchange in the U.S., might be issuing “paper Bitcoin” to BlackRock and other ETFs.

In March, the influx of capital into new spot Bitcoin ETFs drove BTC’s price to an all-time high. However, despite the billions entering the market, Bitcoin’s price has surprisingly stagnated, which has left many investors puzzled.

Coinbase’s Role in Bitcoin ETFs

Critics allege that Coinbase, which serves as the custodian for numerous Bitcoin ETFs including those managed by BlackRock, might not be genuinely purchasing the Bitcoin requested by these funds. Instead, they speculate Coinbase may be issuing “IOUs” or “paper Bitcoin.”

These unverified rumors have gained traction across social media platforms in recent months. Coinbase CEO Brian Armstrong addressed these concerns on X, formerly known as Twitter, asserting that “all ETF mints and burns processed are ultimately settled on-chain.”

BlackRock’s Response and Market Impact

Despite Armstrong’s clarifications, BlackRock filed an amendment with the SEC, requiring Coinbase to release Bitcoin within 12 hours of notice when BlackRock’s customers buy shares of its Bitcoin ETF. Critics viewed this as a validation of their concerns.

Bloomberg ETF analyst Eric Balchunas dismissed these claims as baseless, stating, “There’s never been a case where the custodian doesn’t hold the underlying asset. It would be illegal.” According to Balchunas, similar fears have existed among gold ETF investors for years.

Bitcoin ETFs allow investors to gain exposure to Bitcoin without holding the asset themselves. BlackRock, for instance, buys the corresponding amount of Bitcoin and stores it on Coinbase. This process involves some trust and inherent risk, but it offers convenience to investors.

Rumors linking Coinbase to the issuance of paper Bitcoin date back to May. Pseudonymous trader “Tyler Durden” highlighted the possibility of off-chain transactions, which attracted significant attention online. More recently, MartyParty, a music producer and crypto trader, further fueled these speculations by questioning why Bitcoin’s price isn’t rising despite BlackRock’s purchases.

Eric Balchunas has brushed off these theories as mere “conspiracy” talk. He emphasized the legitimacy and diligence of BlackRock, stating, “BlackRock is a serious company with numerous lawyers. They would not risk their reputation.”

Balchunas also confirmed that BlackRock runs its own blockchain node and continuously updates BTC balances from their wallet addresses to Coinbase Prime each night. Although the firm can show balances to clients on request, it avoids making them public to prevent spam, like dusting attacks.

BlackRock did not respond directly to further questions, referencing an interview with Robbie Mitchnick, head of digital assets, who stated that recent filings were routine updates with no significant changes.

A Coinbase spokesperson reiterated that rumors circulating on X are indeed unsubstantiated, adding that regulatory updates are part of the normal course of operations.

BlackRock’s IBIT fund is currently the largest and most successful Bitcoin ETF traded in the U.S., holding 357,732 BTC valued at approximately $22.6 billion.

The price of Bitcoin has risen over 140% in the past year, according to CoinGecko data, with a significant surge following ETF approvals.

Balchunas pointed out, “Bitcoin’s price has increased significantly. What price would make you happy?”

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