Bitcoin Gets Wrapped in Drama

Wrapped Bitcoin (WBTC) is simply a token on the Ethereum blockchain that is pegged to BTC.

But there's nothing straightforward about the controversy that's been ignited this week as impending changes to the custody and minting model of WBTC have thrown the DeFi world into a ruckus.

Let's unpack the drama that involves $9B in assets, Justin Sun, and Coinbase 👇

WBTC Deal Drama

Last week, BitGo, the longstanding custodian for WBTC, an instrument with over $9B in assets under management, announced its intention to enter into a joint venture with BiT Global, through which BitGo becomes the minority shareholder in a partnership with Justin Sun and the Tron Ecosystem.

The new structure claims to “decentralize” the security model of WBTC by distributing 2 of the 3 keys that control WBTC to BiT Global, which will custody them in Hong Kong and Singapore.

While one of BiT Global’s keys is intended to remain in cold storage as a “backup,” the fact that the Sun’s group will receive majority control over WBTC raised alarms among many in the crypto community concerned that this access could be misappropriated.

Minting & Custody Concerns

In a proposal to begin limiting the usage of WBTC as collateral for MakerDAO’s DAI that floats the possibility of offboarding it entirely, risk analysts at BA Labs cited concern for the unprecedented level of control that Justin Sun is set to receive over the WBTC minting and custody processes.

BA Labs identifies Sun’s prior acquisition of the TrueUSD stablecoin in 2023 as catalyzing major operational deficiencies in the product, alleging it prompted the resignation of TUSD’s previous management team, resulted in the suspension of real-time proof of reserves, and caused interruptions in redemptions that lead to depegs.

Additionally, the proposal highlights worrisome signs of asset misappropriation on Sun’s Huobi exchange, which substitutes USDT reserves with stUSDT, a project rumored to be affiliated with Sun that “purports to hold a reserve of U.S. treasury bills but has not provided clear audits or evidence that the backing exists.”

BA Labs notes additional concern with respect to BitGo, claiming that Galaxy Digital’s refusal to proceed with a May 2021 binding merger agreement in conjunction with the unexpected WBTC divestment proposal indicates lurking BitGo financial stress and counterparty risk.

Although Aave contributor Marc Zeller identified a more measured approach for dealing with looming WBTC concerns, recommending no immediate changes to WBTC markets over the next two months until the partnership comes into effect, it is clear that the collateral status of WBTC has been called into question.

Coinbase Sees an Opportunity?

As crypto users and protocols get busy reassessing the safety of WBTC, Coinbase is hoping to capitalize on BitGo’s perceived blunder with an in-house alternative: cbBTC.

While years of WBTC dominance and high liquidity previously made it the obvious pegged BTC solution, the heightened probability that holders could forsake the token as a result of the Sun acquisition presents an opportunity for competitors to steal market share.

Lead Base developer Jesse Pollak noted his excitement for the implications cbBTC could yield for Coinbase’s L2, which would likely receive first-class bridging support from the exchange.