Looking at the new trend of Bitcoin lending through Vield and Coinbase

Original author: Tiger Research Reports

Original translation: TechFlow

summary

• Bitcoin collateralized lending offers users a way to access funds without having to sell their cryptocurrency, with companies like Vield and Coinbase leading the industry in innovation in this area.
• Although this model has obvious advantages, it still faces major challenges such as high volatility of cryptocurrencies, forced liquidation and regulatory uncertainty.
• The Asian market shows great growth potential in the field of Bitcoin lending, but the key to success lies in clear policy regulations, widespread institutional adoption, and effective risk management.

1. Introduction

Bitcoin collateralized loans are an emerging financial instrument that allows cryptocurrency holders to obtain funds without selling their assets. This model is gradually becoming popular, and professional institutions such as Australia’s Vield and the United States’ Coinbase have launched related services.

Through this loan, users can use Bitcoin as collateral while retaining its potential appreciation. As digital assets become more popular, Bitcoin mortgage loans are becoming a powerful supplement to traditional financing.

However, this lending model also comes with high risks. Unlike traditional collateral such as real estate, Bitcoin prices fluctuate drastically, which may lead to forced liquidation of loans and cause losses to borrowers.

In addition, the regulatory environment for cryptocurrency lending is still unclear. Governments and financial institutions are still exploring how to incorporate such services into the existing financial system. Therefore, both lenders and borrowers need to proceed cautiously in this market full of opportunities and challenges.

This report will analyze the classic case of Bitcoin mortgage lending, explore its potential in the Asian market, and evaluate the related risks and regulatory issues.

2. Case studies from the West: Coinbase and Vield’s crypto lending model

2.1 Vield: Integrating Bitcoin Lending into Traditional Finance

Vield CEO Johnny Phan led a $35 million crypto-backed mortgage business last year. Source: afr.com.

The Australia-based lending company is working to establish itself as a “crypto-native bank.” Vield offers Bitcoin mortgages and a hybrid loan product that combines digital assets and real estate collateral, aiming to establish Bitcoin as a legitimate asset class in the financial system, similar to traditional mortgage securities. Unlike traditional banks that rely mainly on real estate as collateral, Vield innovatively uses Bitcoin and Ethereum as loan collateral, creating a new asset class.

According to Tiger Research, Vield offers loans ranging from $2,000 to $2 million with a term of 12 months, an annual interest rate of 13%, and a 2% handling fee. For an average loan of $120,000, for example, the borrower needs to deposit 1.5 bitcoins (about $240,000) as collateral. If the price of Bitcoin falls, causing the loan-to-value ratio (LTV) to reach 75%, the borrower must add collateral to maintain the 65% LTV requirement. If the price of Bitcoin rises, the borrower can apply to withdraw part of the collateral.

To ensure the safety of funds, Vield stores the borrower’s collateral in a separate secure digital wallet and does not mix or divert these assets for other purposes. All collateral transactions can be traced through the blockchain, further improving the transparency of the loan. Currently, Vield manages approximately $35 million in loans and has not had any defaults. This shows that Bitcoin mortgages have real potential in the financial services sector, despite the volatility of the market itself.

However, traditional financial institutions remain skeptical of this model. Many institutions refuse to accept cryptocurrencies as collateral, mainly because of their excessive price volatility and lack of intrinsic value. Economist Saul Eslake warned that under market pressure, Bitcoin mortgages could exacerbate financial instability and force borrowers to liquidate their assets at a costly cost.

The phenomenon reflects the complexity of integrating cryptocurrencies into the mainstream financial system, with some institutions beginning to accept digital assets while others are cautious about them.

2.2 Coinbase: Bitcoin lending driven by DeFi

 Source: Tiger Research.

Coinbase has launched a decentralized Bitcoin mortgage service by integrating with the Morpho protocol on the Base blockchain. Users can use Bitcoin as collateral to borrow up to $100,000 in USDC stablecoins. This model does not require a credit check or a fixed repayment plan, but instead determines the borrowing amount through an enforced loan-to-value ratio (LTV ratio), ensuring that the collateral always covers the outstanding debt.

Coinbase implements this model using Coinbase Wrapped Bitcoin (cbBTC), a tokenized form of Bitcoin hosted in a Morpho smart contract. This design, while enhancing liquidity and decentralization, also introduces the potential risk of smart contract vulnerabilities and attacks.

For borrowers, the biggest risk is the automatic liquidation of assets. If the price of Bitcoin drops and the LTV ratio exceeds 86%, the system will automatically liquidate the collateral and charge an additional penalty. Although this mechanism protects the interests of the lender, it also exposes the borrower to the risk of passive liquidation in market fluctuations. Unlike traditional loans, Coinbase’s automated liquidation model requires borrowers to always pay attention to the value of their collateral to avoid asset losses.

From a regulatory perspective, Coinbase’s decentralized lending model has both advantages and disadvantages. On the one hand, the use of the Morpho protocol improves transaction transparency and reduces counterparty risk; on the other hand, the legal and tax status of cbBTC is not yet clear, which may raise tax compliance issues. Although this model avoids the risk of failure of centralized platforms such as BlockFi and Genesis, it still faces challenges in terms of regulation, security, and market stability.

At the same time, concerns about financial stability remain. Economists point out that the large-scale adoption of Bitcoin mortgages could bring systemic risks. If the price of Bitcoin suddenly plummets, it could trigger large-scale liquidations, which in turn could trigger a market sell-off. For lenders that rely on private funds, Bitcoin’s high volatility could lead to a liquidity crisis. In addition, as policymakers continue to increase requirements for investor protection and risk disclosure, regulatory pressure may further intensify.

Nonetheless, if Bitcoin collateralized lending continues to develop, it could have a profound impact on traditional loan structures. However, its long-term sustainability will depend on whether risks can be properly managed and compliance can be achieved within regulatory frameworks.

3. Asian market case study: Fintertech

Fintertech is a subsidiary of Japan’s Daiwa Securities that focuses on cryptocurrency mortgage services. This is an important case in the field of cryptocurrency loans in Asia. Fintertech allows users to obtain yen or US dollar loans with Bitcoin or Ethereum as collateral, with an annual interest rate of 4.0% to 8.0%. Borrowers can obtain loans of up to 500 million yen (about 3.3 million US dollars) in as fast as 4 business days, providing cryptocurrency holders with a fast and flexible financing option.

In Japan, Bitcoin mortgages are popular for their tax advantages. According to Japanese tax law, the tax rate on cryptocurrency investment income is as high as 55%. Through Bitcoin mortgages, users can obtain liquidity without selling cryptocurrencies, thereby effectively reducing the tax burden. Both companies and individuals can use this method to meet a variety of funding needs. This shows that Bitcoin mortgages are an efficient financing tool in markets with higher tax rates.

Nevertheless, Fintertech’s model faces certain challenges compared to traditional financial products. The volatility of cryptocurrency prices poses risks to lenders. To ensure the sustainability of the model, institutions need to establish a sound risk management framework and optimize the valuation system for collateral. If other Asian financial institutions can introduce similar models, Bitcoin mortgage loans have the potential to become an innovative financial product and build a bridge between traditional finance and digital finance.

4. Advantages of Bitcoin loan services in Asia

As cryptocurrencies gain popularity in Asia, Bitcoin mortgages are becoming an emerging source of income for financial institutions (FIs). According to forecasts, the global cryptocurrency loan market will reach $45 billion by 2030, with a compound annual growth rate (CAGR) of 26.4%. More and more investors and companies want to obtain liquidity in this way without having to sell their Bitcoin.

Financial institutions in Singapore and Hong Kong have an advantage in this area. This is due to their advanced regulatory frameworks, such as Singapore’s Payment Services Act and Hong Kong’s Virtual Asset Service Provider (VASP) licensing system. As of early 2024, the cryptocurrency loan platform Ledn has achieved $1.16 billion in loan business. This shows that similar services are also expected to achieve significant results in the Asian market.

In addition, traditional banks can attract more customers familiar with cryptocurrencies by cooperating with cryptocurrency exchanges and fintech companies. Such cooperation can not only expand the user base, but also increase revenue by charging loan interest, handling fees, and fiat currency conversion fees.

5. Key risks and regulatory challenges

The following table summarizes the main risks of Bitcoin mortgages and provides a more intuitive understanding of these risks and regulatory challenges through real cases or hypothetical examples.

5.1. Risk Factors: Regulatory Compliance

The regulatory environment for Bitcoin mortgages varies significantly around the world. Different countries have different attitudes towards cryptocurrency loans. For example, Japan has included cryptocurrency loans in the existing financial regulatory framework, while China completely prohibits such activities. To prevent illegal activities, companies must comply with anti-money laundering (AML), know your customer (KYC), and virtual asset service providers (VASP) regulations. Example: South Korea has introduced stricter anti-money laundering policies due to concerns about the potential risks of cryptocurrency loans. This requires lenders to submit detailed compliance documents and conduct strict due diligence. Some companies have had to terminate their cryptocurrency loan businesses due to their inability to meet these requirements. This shows that changes in regulatory policies can directly affect the sustainable operations of companies.

5.2. Risk Factors: Price Fluctuation and Liquidation Risk

Bitcoin prices fluctuate wildly, which poses significant challenges to both lenders and borrowers. When Bitcoin prices suddenly drop, margin calls or forced liquidations may be triggered, causing financial pressure on borrowers. To reduce risk, lenders often require borrowers to provide over-collateralization and protect their investments by monitoring the value of collateral in real time. Example: A Singaporean borrower obtained a $100,000 loan using Bitcoin as collateral. However, after the Bitcoin price suddenly dropped by 30%, the lender quickly liquidated its Bitcoin collateral to cover the losses, causing the borrower to not only lose his collateral but also face a huge financial gap. This situation highlights the potential impact of price volatility on borrowers.

5.3. Risk Factors: Asset Custody and Security

Ensuring the security of Bitcoin collateral is an important challenge for lenders. As cryptocurrencies are vulnerable to hacker attacks or fraud, institutions need to adopt professional custody solutions and work with trusted custody service providers to ensure that assets are properly protected. Example: A decentralized finance (DeFi) lending platform was hacked due to a smart contract vulnerability, resulting in the theft of $50 million in Bitcoin collateral. This incident shows that technical security is a key issue that cannot be ignored in the cryptocurrency loan model.

5.4. Risk Factors: Market Liquidity

The large-scale Bitcoin lending business relies on high market liquidity. However, when the market fluctuates, lenders may be forced to liquidate large amounts of collateral assets. If the market is illiquid, asset prices will fall rapidly, triggering chain liquidations and even causing severe shocks to the entire market. Example: After the FTX crash, Genesis and BlockFi went bankrupt because they were unable to cope with the sharp drop in collateral value and large-scale withdrawal requests. Their failure to sell cryptocurrency assets at a reasonable price caused the problem to spread to the entire industry, causing widespread market chaos. This incident shows that insufficient market liquidity is a major risk that cannot be ignored in the Bitcoin lending model.

6. Conclusion and Future Outlook

Bitcoin mortgage lending is a promising financial innovation that provides cryptocurrency holders with a solution to obtain liquidity without having to sell digital assets. However, this model still faces challenges such as price volatility, regulatory uncertainty and security, which limit the sustainable development of the industry.

In the future, the growth of Bitcoin mortgage loans may be concentrated in regions with friendly regulatory environments such as Singapore and Hong Kong. These regions have a sound regulatory framework and a high rate of cryptocurrency penetration, providing ideal conditions for innovation and revenue growth for financial institutions. Through Bitcoin mortgage loans, financial institutions can not only expand their market influence, but also diversify their business and open up new growth channels.

For businesses and financial institutions, the key to success lies in implementing effective risk management strategies. For example, adopting conservative loan-to-value ratios (LTV), requiring borrowers to provide overcollateralization, and choosing reliable custody solutions to ensure asset security. In addition, cooperation between traditional financial institutions, cryptocurrency platforms, and regulators will also play an important role. Such cooperation can build industry trust and lay the foundation for the long-term development of Bitcoin mortgage loans.