Coinbase winding down ‘Borrow’, users have 4 months to pay off their loans

(Kitco News) – Crypto lending services in the U.S. continue to dwindle as Coinbase has announced it will be winding down its “Borrow” lending service, giving users four months to repay their loans or risk losing their collateral.

“Starting July 20, 2023, Coinbase will begin the gradual process of closing Borrow over the coming months,” the company said in an announcement. “Customers with existing loans will have until November 20th, 2023 to repay outstanding loans.”

As part of the process, Coinbase has stopped opening new lines of credit for users against their Bitcoin (BTC) holdings and has sent correspondence to all Borrow users encouraging them to pay their loans off as soon as possible.

Loans that are due before November 20 are unaffected as long as users continue to make payments until they have completed their loan repayment schedule. Interest rates will remain unchanged throughout the wind-down process.

Users with open loans after Nov. 20 will have their accounts closed and Coinbase will sell the necessary amount of BTC to pay off any unpaid balance.

“We recognize the inconvenience, which is why we’re taking extra measures to ensure a smooth transition for you,” Coinbase said. “We have provided customers with a 4 month repayment period along with access to prioritized customer service through Coinbase One. We are also waiving the typical 2% liquidation fee if you choose to use your BTC collateral to pay back the loan or take no action and we sell the BTC for you.”

In an effort to avoid a negative impact on the market, the exchange will conduct liquidations over a period of 5 days, “gradually decreasing the loan-to-value (LTV) ratio at which [they] liquidate. This will enable us to minimize slippage of any BTC sell orders by spreading them out over time,” Coinbase said.

To help make up for any inconvenience this move will cause users, Coinbase is offering impacted customers 4 months of free membership to Coinbase One, which offers zero trading fees, boosted staking rewards, prioritized customer support, and other benefits. Members who are already subscribed to Coinbase One will have their membership fees refunded.

When asked for a comment, a Coinbase spokesperson told Kitco Crypto that they made the decision to end Borrow so they could “focus our resources on the products and services that our customers care about most,” and noted that Borrow had a “low adoption” rate.

Crypto lending services have been under the microscope since the collapse of Terra/Luna in May 2022, which sent a contagion wave rippling across the ecosystem as the protocol’s Terra USD (UST) stablecoin was a prominent fixture in lending pools.

The scrutiny only intensified after FTX declared bankruptcy in November, which plunged the finances of one of the sector’s largest lenders, Genesis Global Capital, into disarray, and led the firm to ultimately file for bankruptcy.

This also sparked the ongoing dispute between the Digital Currency Group, the parent company of Genesis, and the Gemini cryptocurrency exchange. Gemini’s “Earn” program, which offered users a yield on their cryptocurrency deposits, lent $900 million to Genesis, and is now fighting to get those funds back after Genesis filed for bankruptcy in January.

In the wake of the events of 2022, multiple large platforms that offered lending, including Voyager Digital, Celsius, and BlockFi, ultimately declared bankruptcy.

Coinbase’s move to shut down its lending platform was likely done in order to get out ahead of additional scrutiny from regulators, who have cracked down on crypto lending and other practices in an effort to protect investors.

The top U.S. crypto exchange is currently dealing with a lawsuit filed by the Securities and Exchange Commission on June 6 that alleges the exchange is operating as an unregistered securities exchange and accused it of failing to register the offer and sales of its cryptoasset staking-as-a-service program.