Coinbase’s Bitcoin-Backed Loans for USDC Draws Mixed Reactions
2025-01-17
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Coinbase has introduced Bitcoin-backed loans, allowing users to borrow USDC stablecoin without selling their Bitcoin holdings.
The service, powered by the open-source lending protocol Morpho and built on the Base blockchain, is available to US customers except for those in New York State.
Coinbase Users to Borrow USDC with Bitcoin Collateral
“Bitcoin-backed loans are here. Borrow USDC against Bitcoin, without selling it. Rolling out to US users (ex. NY) starting now. More collateral assets and regions to come. Powered by Morpho Labs and built on Base. The future of finance is onchain,” Coinbase stated.
In a follow-up blog, Coinbase highlighted the advantages of its new offering. It emphasized its ability to delay potential tax implications by allowing users to borrow against Bitcoin rather than selling it.
The company also points to the seamless integration of on-chain protocols like Morpho and Base. According to the exchange, these integrations will make accessing financial services faster and more intuitive.
“This is another major step toward empowering our customers with greater control over their financial lives,” an excerpt in the blog read.
Coinbase’s USDC loan facility enables users to pledge Bitcoin BTCUSD as collateral. The BTC is converted to Coinbase’s Bitcoin wrapper, cbBTC, at a 1:1 ratio and transferred to Morpho’s smart contracts. In return, users receive USDC, which can be used in various ways. For starters, users earn over 4% in rewards and can send it globally without any costs.
Additionally, users can convert USDC to USD for significant expenses, including car purchases or mortgage down payments. Coinbase also committed to streamlining the process, allowing users to borrow up to $100,000 in USDC, depending on the value of their Bitcoin collateral.
Community Reactions to Coinbase’s USDC Loan Facility
According to the blog, interest rates are variable, with Morpho determining the factor automatically based on market conditions. There is no fixed repayment schedule, making it flexible. However, failure to maintain the collateral’s value relative to the loan triggers automatic liquidation. This technicality has drawn mixed reactions from the crypto community.
“This is going to be a huge grab. People put their BTC up as collateral and then some event happens that triggers a dump in price resulting in auto-liquidation and you no longer own your Bitcoin, Coinbase does,” Kurt Knapp, a popular user on X, remarked.
Others expressed concerns about centralization risks and the variable interest rates, citing deviation from the decentralized ethos of DeFi. 
“This sounds convenient for Coinbase users…but centralization and variable interest rates miss the mark for serious DeFi users who value decentralization and cost efficiency,” said Ashley, a proponent for decentralization.
Taken together, these concerns, among others, center on centralization and market volatility. Variable interest rates, recalculated every few seconds, could add unpredictability for borrowers.
“Coinbase says they’re re-starting “Bitcoin loans,” but read the fine print. Coinbase is just the middle man. They wrap bitcoin into cbBTC and deploy it into an Ethereum-based DeFi lending protocol called Morpho. I would not touch this product with a 10 ft pole,” another user added.
Additionally, the risk of liquidation during market downturns presents a significant drawback. If the value of Bitcoin plummets, borrowers could lose their collateral, potentially leading to significant financial losses. Thomas Young, a technology innovation researcher, has also flagged concerns about taxable events with this offering.
As the platform rolls out this service and explores new markets, its ability to address these concerns could determine the product’s success. Meanwhile, while the service is currently limited to the US, Coinbase has plans to expand globally.
The EU is likely the next market due to the alignment of USDC with MiCA regulations. Coinbase’s recent strides towards regulatory clarity in Europe position the EU as the exchange’s potential next target market amid plans to scale this offering internationally.