Finance

Coinbase’s DeFi Leap: How Bitcoin-Backed Loans Disrupt the Market and Challenge Compliance

Coinbase offers competitive Bitcoin-backed loans via DeFi protocol Morpho, raising compliance questions.

October 28, 2025, 12:08 PM

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Executive Summary

Coinbase facilitates Bitcoin-backed loans through the DeFi protocol Morpho, acting as a technology provider rather than a direct lender, which allows it to offer highly competitive rates as low as 5%.

Despite Coinbase’s KYC verification for its users, the underlying lenders on Morpho operate with lower compliance standards, raising concerns about anti-money laundering and terrorist financing, which Coinbase attempts to mitigate through layered screening.

Coinbase’s Bitcoin-backed lending product has surpassed $1 billion in originations and plans to expand loan limits, with the company also applying for a national trust charter, signaling its ambition to integrate DeFi benefits within a regulated financial framework.

The Story So Far

Coinbase discontinued its direct Bitcoin-backed lending service in 2023 due to increased industry scrutiny, prompting the exchange to adopt a new strategy that positions itself as a technology provider connecting users to decentralized finance (DeFi) protocols like Morpho, thereby allowing it to offer highly competitive rates and navigate the complex regulatory environment surrounding crypto lending.

Why This Matters

Coinbase’s innovative model for Bitcoin-backed loans, leveraging the DeFi protocol Morpho, is poised to disrupt the lending market by offering significantly lower rates and increasing accessibility for users. However, this approach presents a complex regulatory challenge, as the differing compliance standards between Coinbase’s KYC-verified users and Morpho’s underlying capital pools could attract scrutiny regarding anti-money laundering. Ultimately, Coinbase’s expansion in this sector and pursuit of a national trust charter highlight a strategic effort to integrate decentralized finance into traditional financial frameworks, potentially influencing future regulatory paradigms and mainstream adoption of hybrid crypto-financial services.

Who Thinks What?

Coinbase believes its model, acting as a technology provider connecting users to the Morpho DeFi protocol, offers competitive rates for Bitcoin-backed loans and maintains robust compliance through a combination of its own KYC, Morpho’s screening, and Circle’s ability to blacklist illicit addresses.

Critics highlight that while Coinbase’s product is lucrative, the lower compliance bar for underlying lenders on the Morpho protocol, managed by firms like Steakhouse, raises significant concerns regarding anti-money laundering (AML) and terrorist financing.

Coinbase is disrupting the Bitcoin-backed lending market by offering competitive rates through a unique model that positions the exchange as a technology provider, rather than a direct lender. This approach allows Coinbase customers to access loans via the decentralized finance (DeFi) protocol Morpho, circumventing some traditional lending barriers, though it raises compliance questions for the underlying capital pools.

Coinbase’s Approach to Bitcoin-Backed Loans

Through its mobile app, Coinbase connects users with Morpho, where they can collateralize Bitcoin for loans in Circle’s USDC or deposit USDC to earn yield. This arrangement means Coinbase itself is not lending assets, but facilitating access to a permissionless DeFi protocol.

This model allows Coinbase to offer rates as low as 5%, significantly lower than competitors like Ledn (10.4% APR) and Figure Technologies (9.9% APR). These competitive rates are determined by Morpho’s protocol, reflecting the supply and demand for USDC within its lending pools.

Compliance and Regulatory Considerations

While Coinbase states that all its users depositing USDC into Morpho vaults are fully KYC (Know Your Customer) verified, the underlying lenders on Morpho, managed by firms like Steakhouse, face a lower bar for compliance. Steakhouse documentation only requires users to “represent and warrant” they are over 18 and not on sanctions lists, without a standard verification process.

Critics highlight that this dynamic could make Coinbase’s product more lucrative but also presents compliance concerns regarding anti-money laundering (AML) and terrorist financing. Despite this, a Coinbase spokesperson emphasized that the combination of Coinbase’s KYC, Morpho’s screening, and Circle’s ability to blacklist illicit addresses makes the architecture unsuitable for bad actors.

Expansion and Future Plans

Coinbase’s Bitcoin-backed lending product recently surpassed $1 billion in originations, with plans to increase loan limits from $1 million to $5 million. The company also applied for a national trust charter with the Office of the Comptroller of the Currency (OCC) this month, following similar moves by other crypto firms like Crypto.com, Circle, and Stripe.

This application, however, does not permit direct lending. Coinbase had previously offered direct Bitcoin-backed loans but discontinued the service in 2023 amid increased industry scrutiny. Coinbase Ventures also participated in a $50 million funding round for Morpho, shortly after the protocol expanded to Coinbase’s Ethereum layer-2 scaling network, Base.

Key Takeaways

Coinbase’s strategy to operate as a technology provider for Bitcoin-backed loans through DeFi protocol Morpho offers users highly competitive rates and broader accessibility. This model, while innovative, navigates a complex regulatory landscape by differentiating the compliance requirements for its own users versus the underlying DeFi lenders. The exchange’s continued expansion in this sector, alongside its pursuit of a national trust charter, underscores its ambition to integrate DeFi benefits within a more traditional financial framework.