# Bitcoin-Backed Loans: A Financial Revolution Led by Vield and Coinbase

Bitcoin-backed loans are becoming an increasingly popular way for cryptocurrency holders to secure liquidity without selling their assets. Companies like Vield and Coinbase are at the forefront of this innovative lending model.

Despite several advantages, challenges such as volatility risks, forced liquidations, and regulatory uncertainties remain significant for both borrowers and lenders. Asia shows strong growth potential for Bitcoin-based loans, but success will hinge on clear regulations, institutional participation, and robust risk management.

## Introduction

Bitcoin-backed loans are crypto-based financial products that allow cryptocurrency holders to secure liquidity without liquidating their assets. Companies like Australia’s Vield and the United States’ Coinbase offer these services, drawing increasing interest from investors as Bitcoin prices rise.

These loan products provide borrowers with the opportunity to leverage their holdings while maintaining their expectations for potential price appreciation. As cryptocurrency adoption expands, Bitcoin-backed loans are expected to become a practical alternative to traditional finance.

However, Bitcoin-backed loans come with inherent price volatility risks. Unlike traditional collateral such as real estate, Bitcoin can experience rapid price fluctuations, exposing investors to unexpected liquidation risks. Additionally, the regulatory environment surrounding crypto-based loans remains uncertain. This report will examine key cases of Bitcoin-backed loan models and analyze their potential impact on the Asian market.

## Case Study: Cryptocurrency Loan Models of Coinbase and Vield

### Vield: Combining Bitcoin Loans and Traditional Finance

Australian platform Vield offers hybrid mortgage loans combining Bitcoin collateral with crypto and real estate collateral. Their goal is to legitimize Bitcoin as a valid collateral asset within the financial system, diverging from traditional banks’ focus on real estate to develop new loan products using cryptocurrency.

Vield provides loans ranging from $2,000 to $2 million with an annual interest rate of 13% and an initiation fee of 2%. For example, to borrow $120,000, approximately $240,000 worth of Bitcoin (1.5 BTC) must be deposited as collateral. If Bitcoin’s price declines and the Loan-to-Value (LTV) ratio reaches 75%, the borrower must deposit additional collateral to reduce the LTV to below 65%. Conversely, if Bitcoin’s value rises, part of the collateral can be withdrawn.

Vield keeps the borrower’s collateral in a secure digital wallet and does not rehypothecate or use it for other purposes. The transaction history of the collateral is traceable via blockchain, enhancing the overall transparency of the loan process. Vield has successfully managed about $35 million in loans with no reported defaults, demonstrating the practical potential of Bitcoin-backed loans despite high market volatility.

However, traditional financial institutions remain skeptical. Many are wary of cryptocurrency-backed loans due to price volatility and perceived lack of intrinsic value. Economist Saul Eslake warns that Bitcoin-backed loans could make the financial system more vulnerable during market stress, as forced liquidations pose significant risks when the market is turbulent.

### Coinbase: DeFi-Based Bitcoin Loans

Coinbase has introduced a decentralized approach to Bitcoin-backed loans. Utilizing the Morpho on-chain lending protocol built on its BASE mainnet, users can deposit Bitcoin as collateral and borrow up to $100,000 in USDC stablecoins without credit checks or fixed repayment schedules. The loan limit is determined by the LTV ratio, designed to ensure collateral always sufficiently covers the outstanding debt.

The core of this model lies in using cbBTC (Coinbase Wrapped Bitcoin), which transforms Bitcoin into an Ethereum-based token, facilitating increased liquidity and integration with decentralized finance.

However, this model involves multiple risks. Smart contract vulnerabilities and hacking risks are present, with liquidation being the most significant threat to users. If Bitcoin’s price falls and the LTV ratio exceeds 86%, collateral is automatically liquidated, and penalties are imposed. This protection mechanism safeguards lenders but increases the likelihood of user liquidations during market downturns. Unlike traditional loans, users must continuously monitor and manage their collateral status in Coinbase’s model.

Regulatory-wise, Coinbase’s decentralized loan structure presents both opportunities and risks. Utilizing on-chain lending protocols like Morpho elevates transaction transparency and minimizes counterparty risk, such as lender bankruptcy. However, the legal status of cbBTC remains unclear, posing various regulatory challenges, including taxation. Considering the collapses of centralized crypto lending services like BlockFi and Genesis, Coinbase’s decentralized model could address some shortcomings but also bring new challenges in regulation, security, and market stability.

Concerns about financial stability abound. Widespread adoption of Bitcoin-backed loans could lead to massive liquidations during sharp cryptocurrency price drops, amplifying market sell pressure. Lenders reliant on private funds might face liquidity crises amid Bitcoin volatility. Financial regulators emphasize investor protection and transparent risk disclosures. Bitcoin-backed loans hold potential to innovate traditional lending, but their sustainability will depend on rigorous risk management and appropriate regulatory frameworks.

## Cryptocurrency-Based Loans in the Asian Market: Fintertech

Daiwa Securities subsidiary Fintertech provides Bitcoin- and Ethereum-backed loans, offering yen and dollar loans with interest rates ranging from 4.0% to 8.0% per annum. Borrowers can secure loans up to ¥500 million (about $3.3 million) within four business days, presenting a fast and flexible funding alternative for cryptocurrency holders.

Notably, Japan’s tax structure spotlights Bitcoin-backed loans as an efficient funding method. With capital gains taxes on cryptocurrency investments reaching up to 55%, Bitcoin-backed loans offer liquidity without triggering tax obligations from selling coins. Both corporations and individuals are leveraging this to minimize tax burdens, highlighting the efficiency of Bitcoin-backed loans in high-tax markets.

However, Fintertech’s model must prove sustainable compared to traditional financial products. Cryptocurrency price volatility remains a significant burden, requiring lenders to establish robust risk management and collateral evaluation systems. Nonetheless, if other financial institutions in Asia adopt similar models, Bitcoin-backed loans could bridge the gap between traditional and digital finance.

## Opportunities for Bitcoin-Backed Loans in Asia

As cryptocurrency adoption accelerates across Asia, Bitcoin-backed loans present new revenue opportunities for financial institutions. The global crypto loan market, experiencing an annual growth rate of 26.4%, is expected to reach $45 billion by 2030. This growth is driven by increasing demand from investors and businesses seeking liquidity without selling their Bitcoin.

Singapore and Hong Kong are particularly well-positioned to adopt these services, supported by advanced regulatory frameworks such as Singapore’s Payment Services Act and Hong Kong’s VASP license. Ledn’s success, with crypto-backed loan transactions totaling $1.16 billion as of early 2024, suggests similar services could achieve significant success in the Asian market.

Traditional banks can also enter this market through strategic partnerships with cryptocurrency exchanges or fintech companies, gaining interest income, loan initiation fees, and fiat currency conversion fees while attracting new, crypto-native customers to enhance competitiveness.

## Key Risks and Regulatory Challenges

To understand the risks and regulatory challenges facing Bitcoin-backed loans, we summarize the key issues below:

### Risk Factor: Regulatory Compliance

Regulatory environments for Bitcoin-backed loans vary significantly by country, reflecting differing government stances on cryptocurrencies. For instance, Japan has somewhat integrated crypto loans into its financial system, while China bans related activities. The burden of complying with Anti-Money Laundering (AML), Know Your Customer (KYC), and Virtual Asset Service Provider (VASP) regulations remains a significant challenge for firms.

**Example:** In South Korea, concerns over crypto-backed loans and enhanced AML regulations have required extensive compliance documentation and rigorous due diligence from lending firms, causing operational difficulties and even leading some to abandon crypto-backed loan models.

### Risk Factor: Volatility and Liquidation Risks

Bitcoin’s price volatility poses significant burdens for both lenders and borrowers. Sharp declines can trigger margin calls and forced liquidations. Lenders must implement over-collateralization requirements and real-time monitoring systems to mitigate these risks.

**Example:** In Singapore, a borrower who secured a $100,000 loan with Bitcoin collateral faced forced liquidation when Bitcoin prices dropped 30%, resulting in substantial financial losses.

### Risk Factor: Custody and Security Issues

Securing Bitcoin collateral requires specialized custody solutions to prevent hacking and fraud. Financial institutions must partner with trusted custody providers to maximize the security of digital assets.

**Example:** A DeFi lending platform experienced a hacking attack exploiting smart contract vulnerabilities, leading to the theft of Bitcoin collateral worth $50 million.

### Risk Factor: Market Liquidity

Large-scale Bitcoin-backed lending operations require sufficient market liquidity. During market instability, liquidation of large collateral volumes could depress asset prices, causing systemic impacts through widespread liquidations.

**Example:** Genesis and BlockFi faced liquidity crises and bankruptcy following the FTX collapse. Simultaneous collateral value drops and large withdrawal requests prevented proper asset liquidation, exacerbating financial turmoil.

## Conclusion

Bitcoin-backed loans are bringing transformative changes to the financial industry, offering an effective liquidity solution for cryptocurrency holders without the need to sell their assets. However, high price volatility, uncertain regulatory environments, and hacking risks are challenges that must be addressed for stable industry growth.

In Asia, Bitcoin-backed loan models are expected to develop primarily in cryptocurrency-friendly jurisdictions like Singapore and Hong Kong. These countries’ structured regulations and high cryptocurrency usage levels suggest new revenue opportunities for financial institutions.

To remain competitive, companies and financial institutions must establish comprehensive risk management frameworks, including appropriate LTV ratios, over-collateralization, and secure asset storage solutions. Additionally, collaboration between traditional financial entities, cryptocurrency firms, and regulatory bodies is crucial to build trust and ensure the long-term stability of Bitcoin-backed loans.

*This article is a comprehensive version of the report “Bitcoin-Backed Loans: Financial Innovation Led by Coinbase and Vield” by global Web3 research firm TigerResearch, a partner of Blockmedia. The full report is available on the TigerResearch official website.*