Coinbase has brought back bitcoin-backed loans and now allows users to borrow up to $100,000 in USDC stablecoins by putting up their bitcoin as collateral.
This is not a new service. Coinbase had it running before, but stopped it in 2023. While it’s supposed to make liquidity more accessible to bitcoin holders, it’s causing a stir among Bitcoiners.
The Coinbase bitcoin loan service is available to US customers (except NY state).
Coinbase has said that there is no credit check, and interest rates are variable depending on the market conditions. What’s unique is that it’s integrated with the Coinbase app and uses Morpho, a DeFi lending protocol on Coinbase’s Ethereum layer-2 network.
Coinbase says “Customers can instantly borrow USDC at competitive interest rates with flexible, open-ended repayment terms.” But these loans are overcollateralized, and you need to put up at least 133% of the loan amount in bitcoin.
For example, to borrow $100,000 you need to put in more than $133,000 worth of bitcoin. If the value of bitcoin drops and the loan-to-value (LTV) ratio goes above 86% the collateral could be liquidated to pay back the loan and fees.
Coinbase converts the provided bitcoin into Coinbase Wrapped Bitcoin (cbBTC), a token that it says is compatible with DeFi protocols. Coinbase has said that the cbBTC is 1:1 backed by bitcoin in its reserves.
Bitcoin-backed loans allow users to access liquidity without selling their bitcoin, which could trigger a taxable event. This is especially good for long-term bitcoin holders who think the price will go up.
“Loans are powered by Morpho, an open-source lending protocol on Base,” Coinbase says. “Crypto-backed loans will launch with Bitcoin as collateral, with plans to add more assets in the future.”
The integration simplifies what was a complicated process.
The Coinbase app removes many of the technical hurdles of DeFi and makes it easy for users. Many users applauded this program, saying it is an easy-to-use interface, hiding the complexity of the decentralized system.
While it has its benefits, Coinbase’s offering has also been met with criticism.
A big point of contention is that the loans aren’t “bitcoin-backed” in the eyes of purists. Critics argue that using cbBTC, a wrapped version of bitcoin managed by Coinbase, goes against the decentralized nature of the digital asset.
Its also argued that these loans don’t rely on bitcoin for collateral nor do they operate on the Bitcoin blockchain.
They point out that the setup is very centralized. Nevertheless, the cbBTC token is backed by bitcoin (at least according to the exchange) in reserve wallets, securely managed by Coinbase.
Another issue is Morpho, a DeFi protocol, which adds complexity and risk, including smart contract vulnerabilities. Morpho has a good reputation in the DeFi space but has no connection to the Bitcoin blockchain.
Coinbase’s previous bitcoin loan program, which allowed users to borrow up to $1 million against 30% of their bitcoin, was shut down in 2023.
It was shut down during a broader digital-asset market downturn and SEC scrutiny. At the time Coinbase said “shifting customer demands” was the reason for ending the service.
And now, bitcoin-backed loans are back as bitcoin prices soar, making the service more appealing to users. But it also brings back memories of the 2022 “crypto lending crisis” where several firms including Celsius and BlockFi went bankrupt.
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