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Coinbase Revives Bitcoin-Backed Loans, Sparking CeFi-DeFi Fusion

Coin WorldThursday, Jan 30, 2025 4:03 pm ET

1min read

Coinbase's re-launch of its Bitcoin-backed loan service has sparked renewed interest in the crypto lending market. The platform, which allows U.S. users to borrow USDC using their Bitcoin as collateral, is a blend of centralized and decentralized finance (CeFi and DeFi). Coinbase converts BTC into wrapped BTC (cbBTC), which is then transferred to Morpho, a DeFi protocol built on Base, for loan management.

The Bitcoin loan market has been growing, with an estimated size of $8.6 billion in 2024, projected to reach $45.6 billion by 2030. The repeal of the SAB 121 accounting rule on Jan. 23 has opened the door for publicly traded banks to develop their own Bitcoin-backed loan services. This move could attract traditional finance institutions, potentially enhancing the security of these loans.

Bitcoin-backed loans offer investors the opportunity to unlock liquidity without selling their coins and can help avoid taxable events. One strategy, known as "buy, borrow, die," involves borrowing against the growing value of BTC each year, maximizing gains while minimizing taxes. From a lender's perspective, using Bitcoin as collateral can reduce idiosyncratic risks and provide enhanced protection.

Currently, around 20 service providers offer Bitcoin-backed loans, including CeFi firms like Wirex, Nexo, and Bitcoin Suisse, as well as DeFi protocols like Aave and Compound. However, the crypto lending market is not without risks. Misuse and theft of customer funds have led to the downfall of several companies, and DeFi-based loans come with their own set of challenges, such as smart contract vulnerabilities and a lack of regulation.

The rescission of the controversial SAB 121 guidance by the SEC on Jan. 23 has paved the way for banks to enter the Bitcoin-backed loan market. This shift, coupled with the recent pro-crypto stance of U.S. legislators, is likely to increase Bitcoin exposure among major banks, driving crypto adoption and potentially reducing sell pressure on Bitcoin. A larger Bitcoin loan market could lead to more competitive rates and improved loan conditions for users and investors.

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