Captain’s note
- Coinbase says its crypto-backed loans run on Morpho, an onchain lending protocol on Base, and that Coinbase provides the interface to it.
- The SEC warns that investors who deposit crypto with a crypto asset entity might cease to have legal ownership of those assets.
- Coinbase’s lending disclosures say liquidation failures can occur because of sudden price drops or insufficient onchain liquidity.
Every crypto loan needs someone, or something, to hold the collateral and sell it if the loan goes bad. In centralized lending that someone is a company. In decentralized finance, or DeFi, it is a smart contract running on a blockchain. The labels get blurry in practice, because a company app can sit in front of an onchain protocol, but the question underneath is always the same: who has the keys to your bitcoin while you owe money?
Centralized lending
A centralized lender works like a company balance sheet. You send it your coins, it records what it owes you, and it lends you money against that record. What it does with the coins in between is governed by its terms and by whatever regulation applies to it.
That model failed loudly in 2022. The FTC says Celsius, which marketed personal loans secured by customers’ crypto deposits alongside interest accounts, took title to and misappropriated deposits totaling more than $4 billion and made unsecured loans totaling $1.2 billion as of April 2022. The CFTC says Celsius froze customer withdrawals on June 12, 2022 and filed for bankruptcy on July 13, 2022 with liabilities exceeding assets by more than one billion dollars. Voyager, which the FTC says falsely told customers their money was FDIC insured, froze accounts and filed for bankruptcy the same month. Those stories are told in Lessons From Crypto Lender Bankruptcies: Celsius, Voyager and BlockFi.
The SEC’s general warning applies to all such platforms: people who deposit funds or crypto with a crypto asset entity might cease to have legal ownership of those assets and might not be able to get them back when they want to.
Onchain (DeFi) lending
In an onchain loan the collateral sits in a smart contract, and the rules, including the liquidation threshold, are written into code that anyone can inspect. Coinbase’s loans are an example: the bitcoin is converted to cbBTC and moved into a Morpho smart contract on Base. Coinbase describes itself as the interface, and its help center, writing about its related lending feature, says Coinbase does not control the smart contracts or the terms of the lending protocol.
This removes the 2022 problem of a company quietly using your collateral. It does not remove risk; it changes the list.
| Risk | Centralized lender | Onchain protocol |
|---|---|---|
| Company misuses collateral | Possible; the SEC warns about rehypothecation | Collateral held by a smart contract under published rules |
| Company bankruptcy | Collateral can be frozen in bankruptcy proceedings | Collateral not on a lender’s balance sheet, but the app you use can still fail |
| Code bugs and hacks | Company systems | Smart contract bugs, hacks or cyberattacks, which Coinbase lists as a risk |
| Liquidation | By the company, often after a margin call | Automatic once the threshold is reached, with no call |
| Liquidation failure | Company absorbs or passes on losses | Can occur in sudden drops or thin onchain liquidity, Coinbase says |
| Who you complain to | The company, regulators | The interface provider; the protocol itself has no help desk |
The speed problem
A smart contract does not phone you. When the loan-to-value crosses the line, liquidation happens, and Coinbase says it cannot prevent collateral from being liquidated on Morpho. Coinbase does send an email when a loan enters its Danger band and offers an optional automatic top-up, but those are features of the app, not of the protocol. If you borrow onchain directly, without an app in between, you may get no warning at all. See Liquidation Risk Explained: What Happens When Your Collateral Is Sold.
The middle ground
Many people meet DeFi through a familiar company. That arrangement gives you a known account, customer support for the app, sponsored network fees and alerts, while the loan itself lives onchain. It also means two sets of risk: the protocol’s and the interface’s. Coinbase lists Coinbase Smart Wallet issues among the risks of its own product, and its lending pages tell users of the backup collateral site to save the link before they need it.
Tip: Whatever the model, ask one question in writing before you borrow: can anyone other than a published, automatic rule move or lend my collateral? If the answer is yes or unclear, assume they can.
Choosing
If you use a centralized lender, the SEC’s 2022 bulletin on crypto interest-bearing accounts is worth rereading: companies offering such accounts do not provide the same protections as banks or credit unions, and crypto sent to them is not currently insured. If you use an onchain loan through an app, read two sets of terms, the app’s and its description of the protocol behind it, because a failure in either can cost you the collateral.
Neither model is safe in the sense a bank deposit is safe; the FTC notes that crypto held in accounts is not insured by the government like dollars in an FDIC-insured bank account. The practical comparison is in How to Compare Crypto Lenders: A Checklist Built From Regulators’ Warnings, and the custody question in more depth in Custody and Rehypothecation: What Happens to Your Collateral.