Coinbase Launches Bitcoin-Backed Loans for USDC Stablecoin

Coinbase has introduced Bitcoin-backed loans, which allow users to borrow USDC stablecoin without selling their Bitcoin holdings.

Powered by the open source lending protocol Morpho and built on the Base blockchain, the service is available to US customers except those in New York State.

Coinbase users to borrow USDC with Bitcoin collateral

The US-based crypto exchange shared the news in a post on X (Twitter). Coinbase said the credit facility may support additional collateral assets in the future.

“Bitcoin backed loans are here. Borrow USDC in Bitcoin without selling it. Now rolling out to US users (eg NY). Additional collateral properties and ranges. Powered by Morpho Labs and built on Base. The future of finance is onchain,” said Coinbase.

In a follow-up blog, Coinbase highlighted the benefits of the new offering. It emphasized its ability to defer tax implications by allowing users to borrow bitcoins instead of selling them.

The company suggests seamless integration On-chain protocols such as Morpho and Base. According to the exchange, these integrations will make access to financial services faster and more intuitive.

“This is another major step in empowering our customers to take more control over their financial lives,” a blog post read.

Coinbase's USDC lending facility allows users to pledge Bitcoin (BTC) as collateral. BTC is converted into Morpho's smart contracts at a 1:1 ratio into Coinbase's Bitcoin wrapper, cbBTC. In return, users receive USDC, which can be used in various ways. For starters, users earn over 4% rewards and can ship worldwide at no cost.

Additionally, users can convert USDC to dollars for significant expenses, including car purchases or mortgage payments. Coinbase has also decided to streamline the process, allowing users to borrow up to $100,000 USDC based on the value of their Bitcoin holdings.

According to the blog, interest rates are variable, with Morpho automatically determining the rate based on market conditions. There is no fixed payment schedule, which makes it flexible. However, failure to maintain the value of the collateral against the loan will result in automatic liquidation. This technicality has drawn mixed reactions from the crypto community.

“It's going to be a massive raid. People will put their BTC as collateral and then there's an auto-liquidation event that causes the price to drop and you don't own Bitcoin anymore, Coinbase does.”

Others have expressed concerns about centralization risks and variable interest rates, citing the unethical nature of DeFi.

“This seems convenient for Coinbase users…but the centralization and variable interest rates miss the mark for serious DeFi users who value decentralization and price efficiency,” said Ashley, a proponent of decentralization.

Combined, these concerns center on centralization and market volatility. Fluctuating interest rates calculated every few seconds add to the unpredictability of borrowers.

“Coinbase says they're starting “Bitcoin loans” again, but read the fine print. Coinbase is just a middle man. They wrap Bitcoin into cbBTC and deploy it into an Ethereum-based DeFi lending protocol called Morpho. I wouldn't touch this product with a 10-foot pole,” another user added. .

In addition, the risk of loss during a market downturn indicates a large deficit. Borrowers may lose their collateral if the price of Bitcoin falls, which could result in significant financial losses. Technology innovation researcher Thomas Young has expressed concerns about taxable events under this provision.

As the platform expands this service and explores new markets, its ability to address these concerns may determine the product's success. Meanwhile, while the service is currently limited to the US, Coinbase has plans to expand globally.

The EU could be the next market as USDC aligns with MiCA regulations. Coinbase's recent regulatory transparency gains in Europe make the EU a potential next target market for the exchange. Plans are underway to scale up this offering globally.