On January 16, 2024, Coinbase (COIN) brought back Bitcoin-backed loans for its US clientele.
The Return of Coinbase Bitcoin Loans
Understanding the prior suspension of Bitcoin loans in July 2023 is necessary before delving into their resumption. Customers could borrow up to $1 million against their Bitcoin holdings under the Coinbase Borrow Program, which Coinbase ended in 2023.
The US Securities and Exchange Commission’s (SEC) complaint alleging that the site served as an unlicensed broker, exchange, and clearing agency was the impetus for this.
The program reignited for several reasons, including more transparent regulations, investment interest, and technical progress made possible by integrating with Morpho.
This relaunch has two major changes compared to the original. First, the largest loan amount is now $100,000. Second, Morpho, an open-source lending protocol, partnered with Coinbase.
Clients can borrow USDC using Bitcoin, which Coinbase will automatically convert to Coinbase Wrapped Bitcoin (cbBTC). Morpho takes the cbBTC and uses its lending pool to offer competitive interest rates that change based on the market.
Consequences for the Cryptocurrency Market
The integration with Morpho will increase the visibility of DeFi protocols to a general audience. This might prompt other big exchanges to launch comparable services, which would speed up the acceptance of DeFi in the mainstream.
Users will be able to obtain liquidity without selling their Bitcoin, which could lead to market stability. Borrowing against Bitcoin also allows users to delay paying capital gains taxes.
However, there are challenges, too. The collateral’s value can fall due to the crypto market’s instability, creating a liquidation risk.
Since DeFi protocols are closely associated with smart contracts, it exposes them to vulnerabilities like contract failures and exploits.
If Coinbase can successfully manage risks, comply with regulations, and provide a smooth user experience, then the Bitcoin-backed loans offered by the platform will be a success.
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