Coinbase Relaunches Crypto-Backed Loans via DeFi Integration with Morpho

Coinbase users in the US (except New York) can now borrow against their Bitcoin directly through the exchange. The crypto-backed loans will become available in other jurisdictions over time.

This marks the second attempt by Coinbase to offer crypto-backed loans. The exchange previously ran a program that let customers borrow up to $1 million against as much as 30% of their Bitcoin holdings. But in July 2023, the exchange officially axed the program following an SEC complaint the previous month that alleged Coinbase had operated as an unregistered broker, exchange, and clearing agency.

A Coinbase spokesperson told CoinDesk in May of that year that the shutdown of Coinbase Borrow was due to reduced demand.

However, the new crypto-backed loans are different from the previous offerings, Coinbase says. The exchange itself isn’t facilitating the loans — it’s just the middleman. The operation is instead powered by Morpho, a DeFi lending protocol with $3.7 billion in deposits.

Paul Frambot, CEO and co-founder of Morpho, told DL News his app’s customisability makes it a good choice for Coinbase’s crypto-backed loans.

“Morpho empowers companies like Coinbase to maintain full control over the products they build,” he said. “It also eliminates the need to relinquish control or governance to third parties, such as DAOs.”

How do DeFi loans work?

In DeFi there are no credit scores to help lenders assess borrowers. Instead all loans are overcollateralised and the actions users can take are governed by hard-coded rules.

Borrowers can deposit any of the protocol’s supported assets as collateral to borrow another asset at a dynamic interest rate, determined by the demand for the borrowed asset.

For example, if a user wants to borrow USDC against their Bitcoin, they’ll first need to convert their Bitcoin to cbBTC. Then they can use the cbBTC as collateral to borrow USDC from the Morpho protocol.

Max Branzburg, VP of Product at Coinbase, told DL News that when users borrow USDC against Bitcoin, their collateral is automatically converted to cbBTC and transferred to the Morpho protocol.

CbBTC is a DeFi compatible version of Bitcoin issued by Coinbase. The token is a one-to-one version of the top crypto, backed by coins held in custody by the exchange.

Because DeFi loans are overcollateralised, borrowers don’t default on them. Instead, the lending protocol lets their collateral be liquidated. This means selling collateral to cover the cost of borrowed assets so the protocol doesn’t accrue bad debt.

Liquidation can happen if the value of a borrower’s collateral drops, or if interest rates rise too high.

While Coinbase offers the loans and covers network fees, it doesn’t protect users from liquidation.

“Customers will be responsible for the variable interest rates assigned to their loan,” Branzburg said.