Coinbase has embarked on a bold initiative by offering Bitcoin-backed loans through its platform, positioning itself as a technology provider rather than a traditional lender. This innovative approach allows customers to access compelling loan rates by tapping into lightly vetted capital pools, which streamline the lending process by not requiring extensive personal information prior to disbursement.
While competitors have navigated the complex landscape of state-by-state licenses to offer similar services, Coinbase’s model circumvents many of these regulatory hurdles. Instead of lending directly to customers, users deposit funds into the decentralized finance (DeFi) protocol Morpho via the Coinbase mobile app. Here, they can use Bitcoin as collateral to secure loans in Circle’s USDC or choose to deposit USDC to earn yield.
In the United States, compliance frameworks such as KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations are necessary to combat financial crimes. This typically entails gathering personal data, including names, addresses, and social security numbers from users. However, the architecture of Morpho is designed to facilitate transactions without the oversight typical of established financial institutions, raising potential compliance issues. Industry observers have noted that while Coinbase’s customers may have adequate defenses against illicit activities, the lenders utilizing Morpho face comparatively lower barriers.
Entities depositing USDC into vaults managed by Steakhouse—a firm associated with Morpho—must assert they are at least 18 years old and not on any sanctions lists, which include countries like Iran and North Korea. However, it appears that no standard verification process is in place for these requirements. Despite this, Steakhouse claims it can suspend access to its services through third-party interfaces if necessary.
A spokesperson for Coinbase emphasized that any user depositing USDC in a Morpho vault undergoes comprehensive screenings to meet KYC and geographic regulations. Furthermore, Circle has the capability to blacklist addresses identified as connected to illicit activities, bolstering the safeguards against misuse.
The Morpho Association, a French nonprofit entity, retains the authority to limit access to certain components of the protocol for various reasons, including legal obligations. Recently, the New York Department of Financial Services approved a limited implementation of Coinbase’s Bitcoin-backed lending product, marking a significant regulatory milestone for the exchange.
Recently, Coinbase’s Bitcoin-backed lending initiative surpassed $1 billion in originations. As customers begin using these funds for larger purchases such as homes and vehicles, the company plans to increase loan limits from $1 million to a substantial $5 million.
A noteworthy development occurred a few weeks ago when Coinbase applied to the Office of the Comptroller of the Currency (OCC) for a national trust charter. Unlike traditional banking charters, this type of charter does not permit institutions to issue loans. Coinbase had previously discontinued its direct Bitcoin-backed lending service earlier this year amid increased scrutiny from industry observers, who had criticized the relatively high APR of 8.7%.
In a strategic move, Coinbase Ventures invested $50 million into Morpho, shortly following the platform’s expansion to Coinbase’s Ethereum layer-2 network, Base. Users on Morpho can access loan rates as low as 5%, a feature Coinbase markets as being significantly lower than traditional offers, such as those from Ledn and Figure Technologies, which charge 10.4% and 9.9% APR, respectively.
While companies like Ledn and Figure Technologies work within a complex framework of lending licenses and are limited in geographical reach, users of Coinbase’s innovative product can benefit from the efficiencies of DeFi. A spokesperson from Steakhouse remarked that borrowers utilizing Morpho are positioned to capitalize on the transparent rules of transaction and settlement, potentially leading to more favorable loan products and lower costs over time.
As the DeFi landscape evolves, some firms are making efforts to integrate traditional financial requirements, exemplifying the ongoing tension between the two sectors. These developments highlight the rapid evolution of financial services in the age of cryptocurrency and the various paths firms are taking to navigate regulatory and operational challenges.
