Morgan Stanley has picked Coinbase and Bank of New York Mellon to safeguard the bitcoin held by its proposed spot bitcoin exchange-traded fund (ETF), deepening Wall Street’s reliance on a small group of specialist crypto firms for the new wave of U.S. spot bitcoin ETFs.
Dual Custody Split Between Coinbase and BNY
The Morgan Stanley Bitcoin Trust, structured as an exchange-traded fund whose shares are expected to list on NYSE Arca, will hold all of its bitcoin with two “regulated third-party custodians”: Coinbase Custody Trust Company LLC and The Bank of New York Mellon.
BNY, chartered as a New York state bank, will act as cash custodian, administrator, and transfer agent, handling fund operations at the 240-year-old lender, while Coinbase Custody, a New York state limited liability trust company, provides the crypto infrastructure.
Cold Storage Model and Pooled Insurance
The prospectus describes a custody framework built around “multi-layer cold storage,” in which private keys are held offline on hardware that has never been connected to the internet, and the bulk of the ETF’s bitcoin and all corresponding keys remain in these cold vaults, with transactions signed offline before they are broadcast to the network.
The custodians maintain a commercial crime and fidelity insurance program that can cover theft and certain security incidents involving assets in both hot and cold storage. The filing warns that this coverage is shared across all of their clients, is not tailored specifically to Morgan Stanley, and may not be sufficient to compensate the fund fully in the event of a major loss.
Additionally, the Trust says it will not use leverage, derivatives, or similar arrangements as it tracks the CoinDesk Bitcoin Benchmark, and that its assets will not be lent or used as collateral.
Coinbase as Prime Broker Adds a Second Dependency
Beyond cold storage, Morgan Stanley will also rely on Coinbase’s trading infrastructure, with Coinbase to serve as prime broker, temporarily holding a portion of the ETF’s assets in a trading balance during creations, redemptions, and Bitcoin sales to cover fees and expenses.
The prospectus says the ETF is “dependent” on BNY, Coinbase Custody, and Coinbase Inc. to operate. If Coinbase or its affiliates were unable or unwilling to continue providing custody or prime brokerage, for example, following future regulatory action, the ETF might struggle to secure replacement providers on similar terms and could be forced to halt creations and redemptions or even liquidate.
Morgan Stanley notes that only a limited number of intermediaries currently have the “reputation and operational capability” to act as custodians or prime brokers for spot Bitcoin ETFs and that Coinbase and BNY may simultaneously serve competing Bitcoin funds.
