TLDR:
Coinbase and Morpho have partnered to offer Bitcoin-backed USDC loans up to $100,000 on the Base blockchain, with Bitcoin automatically converted to cbBTC as collateral
The service is currently available to US customers (except NY state), with plans for global expansion, particularly targeting the EU market
Interest rates are variable and determined by Morpho’s market-driven mechanism, with no fixed repayment schedule
Loans are positioned as a tax-efficient alternative to selling Bitcoin, allowing users to maintain their crypto holdings while accessing liquidity
The service has drawn mixed reactions, with critics raising concerns about centralization risks, auto-liquidation during price drops, and variable interest rates
Coinbase, a leading cryptocurrency exchange, has launched a new lending service that allows users to borrow USD Coin (USDC) using their Bitcoin as collateral.
The program, announced on January 16, 2025, emerges from a partnership with Morpho, a decentralized money market protocol, and operates on Coinbase’s layer-2 blockchain platform, Base.
The new service enables users to borrow up to $100,000 in USDC while retaining ownership of their Bitcoin. When users pledge their Bitcoin as collateral, it is automatically converted to Coinbase Wrapped Bitcoin (cbBTC) at a one-to-one ratio before being transferred to Morpho’s smart contracts.
Currently, the service is available to United States residents, except for those in New York State. Coinbase has indicated plans for international expansion, with the European Union marked as a likely next target market due to the alignment of USDC with MiCA regulations.
Crypto-backed loans on @coinbase powered by Morpho.
Now, millions of users can borrow against their BTC on Coinbase. pic.twitter.com/TRAFouZfZT
— Morpho Labs 🦋 (@MorphoLabs) January 16, 2025
The lending process operates without a fixed repayment schedule, offering flexibility to borrowers. Interest rates are not fixed but instead fluctuate based on Morpho’s market-driven mechanism, which automatically adjusts rates according to market conditions.
One key feature of the service is its potential tax benefits. By borrowing against Bitcoin rather than selling it, users may be able to defer capital gains or losses, making it an attractive option for those seeking liquidity without triggering taxable events.
The borrowed USDC can be converted to US dollars without fees, opening up possibilities for various uses, including major purchases like cars or mortgage down payments. Users can also earn over 4% in rewards on their USDC and send it globally without additional costs.
Morpho’s involvement in the partnership brings substantial credibility to the program. The protocol has grown to become the 12th-largest decentralized application by total value locked, managing over $3.2 billion in 2024, representing a 444% increase in activity.
The introduction of this service follows Coinbase’s launch of cbBTC in September. Since its inception, cbBTC has accumulated a supply worth $2.1 billion, equivalent to 21,495.46 BTC, according to Dune Analytics data created by user eekeyguy.
Mixed Reception
The community response to the new lending service has been mixed.
While some users appreciate the additional financial flexibility, others have raised concerns about potential risks. Critics have pointed out the dangers of auto-liquidation during market downturns, where borrowers could lose their collateral if Bitcoin’s value falls below certain thresholds.
Several users have expressed wariness about centralization aspects of the service. The involvement of Coinbase as an intermediary and the use of wrapped Bitcoin (cbBTC) has led some DeFi purists to question whether the service aligns with decentralization principles.
The variable interest rate structure has also drawn attention. Rates are recalculated frequently, which could create uncertainty for borrowers trying to plan their finances. Some community members argue this variability might make the service less attractive for long-term borrowing.
Technical aspects of the implementation have come under scrutiny. The conversion of Bitcoin to cbBTC and its deployment through Ethereum-based DeFi protocols has raised questions about complexity and potential risks in the loan structure.
For monitoring purposes, users must keep track of their loan-to-value ratio to avoid liquidation events. This requirement places additional responsibility on borrowers to actively manage their positions, particularly during periods of market volatility.
