21.co Integrates Chainlink’s Proof of Reserve into Bitcoin Wrapper

In a move to bolster trust, 21.co, the parent organization of the cryptocurrency asset manager 21Shares, announced on September 23 the incorporation of Chainlink’s proof of reserve into its Bitcoin wrapper, 21BTC. This decision addresses growing concerns regarding custody practices linked to other Bitcoin wrappers.

Enhancing Security with Proof of Reserve

The integration of proof of reserves into 21BTC across Ethereum and Solana offers a layer of protection against malicious activities by providing cryptographic assurances that the minted tokens are fully backed by actual reserves.

21.co stated that this mechanism is designed to increase the transparency and reliability of their Bitcoin-backed tokens.

Rising Skepticism in the Crypto Market

This announcement comes in response to a growing skepticism amongst retail cryptocurrency investors regarding the safety of various Bitcoin wrappers, such as Wrapped Bitcoin (WBTC) and Coinbase Wrapped BTC (cbBTC). Concerns have centered around the adequacy of the underlying spot BTC that backs these tokens.

Chainlink’s Role in Auditing

Chainlink’s proof of reserves technology is designed to continuously audit financial data, including off-chain reserve balances, and relay this information to smart contracts on the blockchain in real-time. This level of oversight is intended to enhance trust and security in the wrapped Bitcoin space.

Controversies Surrounding Custody Practices

On August 9, BitGo, the custodian holding WBTC’s Bitcoin reserves, agreed to allow BiT Global, a cryptocurrency exchange based in Hong Kong, partial access to the multisignature wallet that secures the custodied Bitcoin. This agreement has sparked controversy due to the involvement of prominent figure Justin Sun, causing concern among community members regarding potential misappropriation of collateral.

In light of these issues, the decentralized finance (DeFi) protocol Sky, which was previously known as Maker, decided to discontinue the use of WBTC on its platform. Meanwhile, Coinbase’s cbBTC, which launched on September 12, saw an increase in popularity, quickly becoming the third-largest wrapped Bitcoin token.

Concerns Over Bitcoin Backing Safety

Speculation regarding the security of cbBTC’s backing intensified after BlackRock submitted a request on September 16 to expedite BTC withdrawal times from Coinbase, which is responsible for custodying Bitcoin for its iShares Bitcoin Trust (IBIT).

On September 22, Coinbase’s Chief Legal Officer, Paul Grewal, addressed fears raised by users concerning the potential inability of Coinbase to compensate cbBTC holders for any BTC lost due to security breaches.

Regulatory Oversight for Custodians

In the U.S., custodians and exchange-traded fund (ETF) sponsors such as Coinbase and BlackRock are subject to stringent regulatory oversight, which includes regular audits by third parties. This regulatory framework is designed to protect the interests of investors and enhance the overall credibility of the cryptocurrency markets.

Eric Balchunas, an analyst at Bloomberg Intelligence, mentioned that BlackRock would provide institutional clients access to certain information about their holdings but would not publish comprehensive data to the public. He emphasized that BlackRock has a long history of managing ETFs efficiently, which adds to their trustworthiness in the industry.