Coinbase Launches Bitcoin-Backed Loans In The US – Minus NY

Coinbase users in the US can now borrow funds against their Bitcoin holdings. However, due to regulatory challenges, New York residents will be excluded from this service.

This service, now powered by the DeFi protocol Morpho, allows users to access loans backed by crypto assets directly through the exchange. Coinbase plans to expand the offering to additional regions over time.

Crypto-backed loans have had a troubled history. The 2022 crypto market downturn saw major lending platforms like Celsius, Genesis, and BlockFi collapse. The incidents significantly reduced trust in such services and resulted in billions of dollars in losses. Coinbase, however, emphasizes that its new approach differs from previous failed models.

Unlike traditional lending setups, Coinbase acts as an intermediary rather than the loan provider. Morpho, which holds $3.7billion in deposits, manages the lending operations. Borrowers must post collateral in Bitcoin, which is converted into cbBTC, a wrapped Bitcoin token issued by Coinbase. This token is then deposited into the Morpho protocol.

Key features of Coinbase’s crypto loan program

• Borrowers can access up to $100,000 in USDC, Coinbase’s stablecoin, backed by collateral exceeding the borrowed amount.
• Collateral is subject to liquidation if its value falls or interest rates rise, ensuring the protocol avoids bad debt.
• Coinbase charges network fees but does not cover liquidation risks for users.

This isn’t Coinbase’s first foray into crypto-backed loans. The exchange previously allowed customers to borrow up to $1m against Bitcoin holdings but discontinued the program in 2023 following a Securities and Exchange Commission (SEC) complaint.

How are DeFi loans different?

In DeFi, loans are overcollateralized, and user actions are governed by smart contracts rather than credit scores. Borrowers deposit assets as collateral and receive another asset, like USDC, at a dynamic interest rate. If collateral values decline or interest rates surge, liquidation occurs to protect the protocol from defaults.

Coinbase’s integration of Morpho reflects the growing demand for on-chain personal loans, which operate differently from traditional lending. Instead of relying on credit scores, these loans require borrowers to provide collateral significantly exceeding the borrowed amount. This system appeals to crypto traders seeking liquidity without selling their assets, often using loans to fund investments or personal expenses like car or home purchases.

Strengthening Coinbase’s ecosystem

The program also boosts Coinbase’s ecosystem. The company’s stock price has already gone up since the announcement today, which has been bearish for the past month.

Users mint cbBTC on Coinbase’s Layer-2 network, Base, and borrow USDC, creating demand for its native tokens and infrastructure. Morpho, funded in part by Coinbase, serves as the platform for these transactions, showcasing a strategic alignment across Coinbase’s services.

By addressing the need for secure and accessible loans, Coinbase aims to redefine crypto-backed lending, offering users a more reliable option for leveraging their Bitcoin holdings.

1. 01.

   What are DeFi loans?

   

   DeFi loans are decentralized, crypto-backed loans facilitated through blockchain protocols. They require borrowers to provide collateral—typically more than the loan amount—and use smart contracts to govern the terms without relying on traditional credit scores.

2. 02.

   Are DeFi loans safe?

   

   DeFi loans are generally secure due to transparent, automated smart contracts and overcollateralization, which protects protocols from defaults. However, risks include liquidation if collateral value drops, high volatility in crypto prices, and potential vulnerabilities in smart contracts. Borrowers should assess these factors before engaging.