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Custodial Bitcoin tokens let holders borrow without selling BTC

Circle’s cirBTC, along with alternatives from Coinbase and WBTC, rely on custodians and token minting and redemption to move BTC exposure across networks.

Reported · Written up by our desk · Market Structure

Bitcoin holders who need cash can borrow against their BTC instead of selling it, keeping exposure to Bitcoin while using it as loan collateral. The complication is that many lending apps operate on Ethereum, where the collateral cannot directly be “read” from Bitcoin’s network without an interoperability wrapper.

One approach involves depositing BTC with a custodian and receiving a token that represents the Bitcoin on another network. In this setup, the lending application can accept the wrapped token, while the holder’s ability to redeem it depends on the custodian continuing to hold the underlying BTC, the token’s value, and the provider and loan terms.

Circle outlined its approach to cirBTC on Sept. 4, positioning it as competing with Coinbase’s cbBTC and the established WBTC. All three describe a broadly similar workflow, where depositing BTC can trigger minting of a corresponding token on another network, and redemption burns or removes the token as the custodian releases the underlying Bitcoin through its procedures.

BitGo’s description of WBTC also highlights how deposit and redemption can involve approved merchants that handle conversions with the custodian while charging a fee. Meanwhile, secondary buyers can purchase existing tokens, transferring the token without adding new BTC to custody, leaving custody arrangements and redemption rules as the key dependencies for holders.

Latest closeBitcoin $79,310.40 ▲1.1%|Ethereum $2,511.48 ▲1.1%

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