January 2025 – Fintechnically Speaking

Earlier this month, Coinbase, the largest cryptocurrency platform in the U.S., partnered with Morpho Labs, the biggest onchain lending platform on Coinbase’s Base network, to introduce a bitcoin-backed loan service. This new service, which operates on Base, Coinbase’s Ethereum layer-2 network, lets users borrow up to $100,000 in USD Coin (USDC) by using their Bitcoin as collateral and is available to all U.S. residents, except those in New York.

Borrowing USDC against Bitcoin has been possible on platforms like Morpho and other DeFi services for some time. However, with this new collaboration, Coinbase has integrated Morpho’s lending services directly into its own interface, which it believes will attract borrowers with easier access and a more user-friendly experience. The service aims to close the gap between holding crypto assets for the future and putting them to use today. Although it currently will only support Bitcoin, Coinbase plans to eventually extend the service to other crypto tokens.

Coinbase merely facilitates the exchange; it does not directly issue loans. Borrowers can always choose when they want to pay off their loans because there are no set repayment schedules. Interest rates are adjusted by Morpho based on real-time market conditions. Unlike traditional loans that depend on credit scores, crypto loans instead require substantial collateral. Morpho’s platform ensures a minimum collateral ratio of 133%. If the loan balance, including accrued interest, reaches 86% of the collateral’s value, liquidation is automatically triggered, as well as repayment and penalty fees. Borrowers are allowed to adjust their loan-to-value ratio whenever they want as long as the ratio stays above the required threshold. Through the Coinbase app, Coinbase will share liquidation trigger warnings if the loan balance is reaching the threshold, giving borrowers a chance to cure.

According to the Coinbase website, to access the service, borrowers can go to the Cash tab within their Coinbase app, click on “Borrow,” and enter the amount of USDC they want to borrow against their Bitcoin. After confirming the amount, the bitcoin that is pledged as collateral is converted to Coinbase Wrapped BTC (cbBTC) token, a bitcoin-backed token issued by Coinbase, and then transferred onchain to a Morpho smart contract. Morpho will then disburse the USDC loan, which borrowers will be able to see instantly in their Coinbase account.

This launch marks Coinbase’s second entry into the Bitcoin lending market. In November of 2023, the platform officially ended its “Borrow” program, which allowed borrowers to get cash loans backed by their bitcoin.

The new service has advantages as well as risks. Selling bitcoin can result in capital tax gains or losses. For this reason, as well as others, many crypto traders are hesitant to sell their holdings. Now, they can instead borrow against their Bitcoin and use their digital assets, likely avoiding a sale and tax consequences. However, the tax implications remain unclear, mainly because the conversion from bitcoin to cbBTC might be deemed a taxable event in the future. In addition, the volatility of bitcoin prices could affect the value of the pledged collateral, possibly leading to liquidation if the required thresholds are not satisfied. Finally, while using a DeFi platform like Morpho may offer greater transparency, smart contracts historically carry risks, such as bugs and hacks. We will continue to watch these and related developments as the industry continues to mature and work through challenges.

Disclaimer: The content provided is for informational purposes only and does not constitute financial, investment, or legal advice. While our law firm has substantial experience in cryptocurrency law and regulation, we do not offer investment advice or opinions on cryptocurrency as an investment. Consult a financial advisor before investing.

January 24, 2025March 28, 2025 by Duane Morris

By Executive Order, the Trump Administration Takes a Stance in Support of Crypto

By Mauro M. Wolfe and Vincent J. Nolan III

On January 23, 2025, President Donald Trump took the first major step to fulfill his campaign promise to make the United States the “crypto capital of the planet,” issuing an executive order entitled “Strengthening American Leadership in Digital Financial Technology.” The order outlines a strategic framework for promoting U.S. leadership in digital assets and financial technology.

Read the full story on the Duane Morris LLP website.

January 16, 2025March 28, 2025 by Duane Morris

The CFPB’s New Proposed Rule to Protect Crypto Consumers from Theft

By Mauro M. Wolfe and Carolina Goncalves

Like banks, cryptocurrency firms are not immune from attacks designed to steal consumer assets, which attacks reportedly caused billions in crypto losses for consumers in 2024 alone. As a result, the US Consumer Financial Protection Bureau (CFPB) proposed a rule intended to protect crypto users from illicit activities by requiring cryptocurrency firms to reimburse consumers for stolen funds. The Electronic Funds Transfer Act (EFTA) and Regulation E currently limit consumer liability for unauthorized electronic fund transfers (EFTs) and impose investigation and error resolution obligations (e.g., funds in reserve) on financial institutions when notified that a consumer’s funds have been compromised. The proposed rule would provide similar consumer protections in the event of an unauthorized cryptocurrency transfer from an account established primarily for personal, family, or household purposes.

The EFTA and Regulation E apply to an EFT authorizing a financial institution to debit or credit a consumer’s account. The CFPB’s definition of “financial institution” includes nonbank entities that (a) hold a consumer account or (b) issue an access device and agree with a consumer to provide EFT services. The CFPB has also determined that “funds” include digital assets, like stablecoins, that operate as either a medium of exchange or as a means of paying for goods and services. The CFPB’s definition of “account” is also broad enough to include nonbank asset accounts (e.g., accounts on gaming platforms, virtual currency wallets) with features similar to those of more traditional deposit or savings accounts, such as paying for goods or services from multiple merchants, having the ability to withdraw funds or obtain cash, or conducting person-to-person transfers.

The proposed rule intends to establish a more consistent application of the EFTA and Regulation E to a range of “emergent payment mechanisms” by requiring “market participants offering new types of payment mechanisms to facilitate electronic fund transfers [to] understand whether their account meets the definition of ‘other consumer asset account,’ including whether it is established for ‘personal, family, or household purposes.’” The proposed rule is open to public comments until March 31.

We anticipate material changes to digital asset and blockchain policy when the next chapter begins under the Trump administration. The broader question for consideration is where consumer protection will fit within crypto regulations. We hope for the benefit of retail investors that it is of paramount importance.

January 16, 2025March 28, 2025 by Duane Morris

Coinbase Wins Another Partial Victory in its Battle for Clarity on Crytpo Regulation

By Sheila Raftery Wiggins and Vincent J. Nolan III

Following its win in the Southern District of New York (SDNY) last week pausing the Securities and Exchange Commission’s (SEC) enforcement suit against it (see our recent blog post on the decision here), Coinbase, Inc. has won another partial victory in the Third Circuit Court of Appeals. This time, Coinbase successfully petitioned the Third Circuit to require the SEC to explain to Coinbase the reasons why it will not engage in crypto rulemaking.

Over the last several years, the crypto community has been very critical of the SEC’s enforcement by litigation approach, arguing that more clarity was needed on how to comply with the law. In July 2022, Coinbase filed a petition with the SEC, seeking to force the agency to engage in rulemaking and promulgate new rules clarifying how and when digital assets qualify as securities under existing federal securities laws. After some skirmishing in the Third Circuit over the timing of the SEC’s response, in December 2023, the SEC denied Coinbase’s rulemaking petition.

The SEC’s written denial was short, its reasoning contained in a single paragraph. It alluded to three bases for its decision: (1) it disagreed with Coinbase’s concerns (as set forth in the rulemaking petition) that application of existing securities law to the crypto environment was “unworkable;” (2) the SEC had other priorities; and (3) the SEC preferred to proceed incrementally.

While the SEC “suggested” these The Third Circuit found the SEC’s order “conclusory and insufficiently reasoned” and therefore in violation of the procedures under the Administrative Procedures Act. The court noted that any of the three grounds asserted in the SEC’s decision “could be sound and independently sufficient bases for denying a rulemaking petition.” But the SEC was required to provide more than conclusory statements and had to explain its reasoning to demonstrate that “its decision considered all important aspects presented by the petition and resulted from reasoned decision making.”

As a result, the Third Circuit granted Coinbase’s petition in part and remanded the matter to the SEC for a more complete explanation of the basis for the denial of the rulemaking petition.

The victory is only partial, however. Coinbase had also asked the Third Circuit to require the SEC to engage in rulemaking. The court declined to order the agency to institute rulemaking proceedings, finding that this was not the “extreme situation” that would warrant the “extraordinary remedy” of a court forcing an administrative agency to engage in rulemaking.

While the judges in the appellate panel were in agreement on the decision, there was some disagreement as to Coinbase’s argument that it had been denied fair notice and due process. Judge Stephanos Bibas, who joined the majority opinion, filed an interesting concurring opinion to address what he saw as a constitutional issue that is “not yet teed up,” but is waiting in the wings. Based on the due process principle that regulated parties should know what is required of them so they may act accordingly, Judge Bibas found that the SEC “repeatedly sues crypto companies,” yet “will not tell them how to comply” with the law. “[T]hat caginess,” according to Judge Bibas, “creates a serious constitutional problem; due process guarantees fair notice.”

While neither the decision itself nor Judge Bibas’ concurrence bring the clarity ultimately sought by the crypto community, the Third Circuit’s decision to require the SEC to explain its denial of Coinbase’s crypto rulemaking petition, coupled with last week’s decision by the SDNY to pause the SEC’s enforcement suit against Coinbase to allow the Second Circuit to opine on the SEC’s application of the securities laws to digital assets, ensure that these issues will now be addressed during and most likely by the Trump administration, which has promised to create a crypto-friendly environment.

January 14, 2025March 31, 2025 by Duane Morris

Court “Pauses” SEC Litigation Against Coinbase to Allow Appeal to Clarify the Relationship Between Crypto-Assets and Securities Law

By David Golden and Vincent J. Nolan III

Judge Katherine Polk Failla from the U.S. District Court for the Southern District of New York has paused the Securities and Exchange Commission’s (SEC) lawsuit against Coinbase, Inc. This rare move will allow Coinbase to appeal Judge Failla’s previous decision to deny Coinbase’s efforts to dismiss the SEC’s lawsuit.

In April 2024, Judge Failla, applying the Howey test used by courts to determine whether cryptocurrency transactions should be classified as investment contracts under federal securities laws, had denied Coinbase’s motion to dismiss the SEC’s complaint and allowed the suit to proceed, accepting (at that stage) the SEC’s argument that “Coinbase’s business of intermediating transactions in cryptocurrency amounted to the operation of an unregistered brokerage, exchange, and clearing agency in violation of federal securities laws.”

But on January 7, 2025, Judge Failla recognized that the varying decisions in recent years regarding application of the Howey Test (including the Ripple and Terraform cases) demonstrated fundamental difficulties in applying Howey to crypto transactions. Central to this decision was Coinbase’s argument that the tokens at issue are akin to commodities because they have no inherent value outside of the “ecosystem” in which they were issued or consumed and cited examples of other such commodities, including carbon credits, emissions allowances, and even expired Taylor Swift concert tickets. Judge Failla acknowledged the court’s use of the “digital ecosystem” in the application of the Howey test, noting that her own prior decision denying Coinbase’s motion to dismiss had concluded that “crypto-asset transactions met the ‘common enterprise’ prong of Howey because crypto-asset purchasers’ ability to profit depends on the development and expansion of the ecosystem.” Judge Failla ultimately agreed with Coinbase at least to the extent that “[t]here is indeed substantial ground to dispute how Howey is applied to crypto-assets and the role of the surrounding digital ecosystem in that analysis.”

This decision does not bring the clarity that many seek in the ongoing battle between the SEC and the crypto community. However, the “pause” could give much-needed time for Congress to enact new legislation, for a circuit court to rule on the application of the Howey test, for the Trump Administration to issue new executive orders, or for the new SEC Chairman to settle the case and provide further guidance on the issue.