The world of decentralized finance (DeFi) continues to evolve, and one of the most significant developments in recent months is Coinbase’s re-entry into the crypto lending space. This time, the U.S.-based cryptocurrency giant is teaming up with Morpho Labs, the leading onchain lending protocol on Coinbase’s Base network, to launch a Bitcoin-backed loan service. The move marks a strategic expansion of financial tools available to crypto holders and underscores the growing convergence between centralized platforms and DeFi innovation.
A New Chapter in Crypto Lending
Earlier this month, Coinbase announced a collaboration with Morpho Labs to introduce a bitcoin-backed lending solution that allows users to borrow up to $100,000 in USD Coin (USDC) using their Bitcoin as collateral. This service operates entirely on Base, Coinbase’s Ethereum layer-2 blockchain, and is accessible to all U.S. residents—except those in New York, where regulatory restrictions remain stringent.
While borrowing stablecoins against Bitcoin has long been possible through various DeFi platforms, this integration brings a new level of accessibility. By embedding Morpho’s lending engine directly into the Coinbase app, the platform aims to simplify the borrowing process for mainstream users who may find traditional DeFi interfaces intimidating or complex.
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How the Bitcoin-Backed Loan Service Works
The process is designed for ease of use. Users can navigate to the Cash tab in their Coinbase app, select “Borrow,” and specify the amount of USDC they wish to borrow. Once confirmed, the Bitcoin used as collateral is converted into Coinbase Wrapped BTC (cbBTC)—a tokenized version of Bitcoin issued by Coinbase that maintains a 1:1 peg with BTC.
This cbBTC is then transferred onchain to a Morpho smart contract, which facilitates the loan issuance. Almost instantly, borrowers see the borrowed USDC reflected in their Coinbase account balance, ready for use.
It’s important to note that Coinbase does not issue loans directly. Instead, it acts as an intermediary, connecting users with Morpho’s decentralized lending pool. Loan terms are flexible: there are no fixed repayment schedules, and borrowers can repay at any time. Interest rates are dynamic, adjusted in real-time based on market demand and liquidity conditions within the Morpho protocol.
Risk Management and Collateral Requirements
Crypto loans differ fundamentally from traditional credit products—they don’t rely on credit scores but instead require over-collateralization. In this case, Morpho enforces a minimum collateral ratio of 133%. This means borrowers must pledge at least $1.33 worth of Bitcoin for every $1 they borrow.
To protect lenders, the system includes automatic liquidation safeguards. If the value of the outstanding loan—including accrued interest—reaches 86% of the collateral’s value, the position becomes vulnerable to liquidation. At this point, Coinbase sends warning notifications through the app, giving users a chance to either repay part of the loan or deposit additional collateral to avoid forced closure.
Borrowers retain control over their loan-to-value (LTV) ratio and can adjust it anytime, provided they stay above the required threshold. This flexibility empowers users to manage risk proactively while maintaining access to liquidity.
Why This Matters: Bridging Holding and Utility
One of the persistent challenges in crypto investing is the tension between holding assets long-term and needing short-term liquidity. Selling Bitcoin to access cash often triggers capital gains taxes and may go against an investor’s long-term strategy.
This new service offers a compelling alternative: users can leverage their Bitcoin without selling it, potentially avoiding taxable events and preserving their investment thesis. For many, this represents a smarter way to use digital assets—turning dormant holdings into working capital.
However, tax implications remain uncertain. While borrowing against assets is generally non-taxable under current U.S. law, the conversion of Bitcoin into cbBTC could be interpreted as a taxable event in the future, depending on IRS guidance. Users are advised to consult tax professionals before participating.
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Volatility and Smart Contract Risks
Despite its advantages, the service carries inherent risks. Bitcoin’s price volatility means that sudden market drops can quickly erode collateral value, increasing liquidation risk. Even with alerts, rapid price movements may leave borrowers with little time to react.
Additionally, because the loans are facilitated through DeFi smart contracts, they are exposed to potential vulnerabilities such as coding bugs or exploits. While Morpho has undergone multiple audits and has a strong security track record, no system is entirely immune to risk.
Transparency is a strength of DeFi—users can verify transactions on-chain—but it doesn’t eliminate operational or technical threats. As the ecosystem matures, ongoing improvements in auditing standards and insurance mechanisms will be crucial.
Coinbase’s Second Attempt at Crypto Lending
This launch marks Coinbase’s second foray into crypto-backed lending. In November 2023, the company discontinued its original “Borrow” program, which allowed users to take cash loans secured by Bitcoin. That earlier version was more centralized and less integrated with DeFi infrastructure.
The new model reflects a shift toward hybrid finance—combining the usability of centralized platforms with the openness and efficiency of decentralized protocols. By partnering with Morpho rather than building its own lending engine, Coinbase reduces development overhead while offering users access to deep liquidity pools.
Looking ahead, Coinbase plans to expand the service beyond Bitcoin to include other supported crypto assets—a move that could significantly broaden its appeal.
Frequently Asked Questions (FAQ)
Can I use this service outside the U.S.?
No, the Bitcoin-backed loan service is currently available only to U.S. residents, excluding those in New York due to state-specific regulatory limitations.
Is there a minimum loan amount?
The service does not specify a minimum borrowing amount, but users must meet the 133% collateral requirement regardless of loan size.
Does Coinbase charge fees for using this service?
Coinbase does not charge direct fees. However, interest rates are set by Morpho based on market conditions, and liquidation penalties apply if thresholds are breached.
What happens if my loan gets liquidated?
If your loan-to-value ratio hits 86%, your position may be liquidated. This involves selling part of your collateral (cbBTC) to repay the debt, plus a penalty fee. You’ll receive warnings before this occurs.
Is borrowing against Bitcoin taxable?
Generally, taking out a loan is not a taxable event. However, converting Bitcoin into cbBTC might be considered a taxable transaction in the future. Consult a tax advisor for personalized guidance.
Will other cryptocurrencies be supported in the future?
Yes, Coinbase has indicated plans to extend the lending service to other crypto tokens beyond Bitcoin, though no timeline has been announced.
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The Road Ahead
Coinbase’s partnership with Morpho Labs signals a maturing crypto ecosystem—one where centralized exchanges and DeFi protocols collaborate to deliver seamless financial experiences. As more users seek ways to utilize their digital assets productively, services like Bitcoin-backed lending will play an increasingly vital role.
With user-friendly access, real-time risk management tools, and integration into a trusted platform, this offering lowers barriers to DeFi participation. Yet it also reminds us that innovation comes with responsibility—users must understand both the opportunities and risks involved.
As regulatory clarity improves and technology evolves, we can expect further convergence between traditional finance and decentralized solutions—ushering in a new era of financial empowerment built on blockchain infrastructure.