Coinbase's Bitcoin Loans Are Not What They Seem
Earlier today, Coinbase announced the launch of Bitcoin-Backed Loans using Base, its native blockchain. But theres one problem. (Actually, two.)
These loans are not backed by Bitcoin, nor are they even on the Bitcoin blockchain.
Its disappointing that, in 2025, companies are still willingly omitting key details to mislead Bitcoin holders into giving up custody of their coins.
Heres the truth: these loans are collateralized by cbBTC, Coinbases Bitcoin-wrapped product designed to compete with wBTC and tBTC. This is not Bitcoin. In fact, cbBTC is arguably the most centralized of these wrapped BTC tokens. To understand the trust assumptions associated with wrapped BTC, I recommend this excellent post by the Bitcoin Layers team: Analyzing tBTC Against wBTC and cbBTC.
Heres the TL;DR:
The BTC backing the cbBTC token is held in reserve wallets managed by Coinbase, a US-based centralized custodial provider. Coinbase holds funds backing cbBTC in cold storage wallets across a number of geographically distributed locations and additionally has insurance on funds they custody.
Furthermore, instead of issuing these loans on a blockchain even remotely related to Bitcoin (such as Bitcoin sidechains or Bitcoin L2s), Coinbase is issuing them through Morpho Labs, a DeFi platform best described as an AAVE competitor. While Morpho is a well-established platformand I dont doubt its securityit has no connection to Bitcoin.
I, for one, look forward to seeing actual Bitcoin-backed loans issued on the Bitcoin network itself. Many L2 teams are working hard to make this a reality, striving to minimize trust assumptionsor even eliminate the need for bridging altogether (bullish!).
Why do we need native Bitcoin-backed loans in the first place? Consider this: many Bitcoiners today face stringent tax regulations that impose hefty liabilities on long-term holders who sell their Bitcoin to fund significant purchases like a house or a car. Taking out a loan backed by BTC allows individuals to avoid triggering these tax events.
Moreover, most Bitcoiners are confident that Bitcoin's price will be significantly higher in the future than it is today. So why would anyone sell an asset with such promising long-term potential? Bitcoin-backed loans enable holders to retain exposure to Bitcoin's upside while accessing the liquidity needed to meet lifes financial demands.
In todays market, the options for Bitcoin-backed lending are limited. You can either rely on centralized companies (like the reputable team at Unchained) or turn to "DeFi" protocols, which are often centralized themselves and, in some cases, riskier than centralized alternatives like Unchained. However, there is currently no truly Bitcoin-native solutionno option for Bitcoiners to maintain custody of their coins while accessing loans.
Some companies, like Lava.xyz, are beginning to address this gap. However, their market share remains a small fraction of the volumes handled by existing DeFi platforms. (Keep an eye on Lavatheyre poised to make waves in 2025!)
One quote from the original announcement stood out to me:
The integration of Bitcoin-backed loans on Coinbase is 'TradFi in the front, DeFi in the back,' said Max Branzburg, Coinbase's vice president of product, in a statement to The Block.
Lets call it what it really is: centralized in the front, and centralized in the back.
Its time to leave these misleading offerings behind and bring true Bitcoin Finance (BTCfi) to usersnot just marketing buzzwords and half-truths.
Instead of saying: Bitcoin backed on-chain loans lets say: multisig-backed derivatives loans on a centralized chain.
This article is a Take. Opinions expressed are entirely the author's and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Articles I write may discuss topics or companies that are part of my firms investment portfolio (UTXO Management). The views expressed are solely my own and do not represent the opinions of my employer or its affiliates. Im receiving no financial compensation for these takes. Readers should not consider this content as financial advice or an endorsement of any particular company or investment. Always do your own research before making financial decisions.
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