Caitlin Long, the founder of Custodia Bank, is sounding the alarm about the race by spot Bitcoin Exchange Traded Fund (ETF) issuers in the United States to slash fees to near zero. Taking to X on January 8, the founder urged clients planning to buy these regulated products to be cautious about these ultra-low fees, as they could indicate hidden risks.

The Spot Bitcoin ETF Fee Race Is A Concern

Long points to the recent news that Ark Invest, one of the multiple spot Bitcoin ETF applicants, is offering a fee of 0.25%. The decision to further slash fees follows BlackRock’s move to drop theirs to as low as 0.30%. 

In response, the founder analyzed that clients should be critical, especially when fees are lower than costs. Most importantly, Long continued, prospective clients should ask how the asset manager, in this case, BlackRock or Ark Invest, is making money managing the fund. With no-fee funds, the answer, the founder added, is often on securities lending.

Usually, securities lending is a practice where the ETF lends out the Bitcoin it holds in its portfolio to other investors, who then use it for their purposes. This can generate revenue for the ETF issuer but also exposes investors to the risk that the borrower will not return the Bitcoin. 

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It’s quite probable that this could be the case, as the SEC plans to approve a spot Bitcoin ETF that actual Bitcoin will back. This means that the issuer, most of whom will hold their coins through Coinbase Custody, will have BTC on their balance sheet.