Bitcoin-Backed Loan Custody Models Explained

Originally published 16 May 2024. The founder’s opening recollection is retained below; product and competitor sections have been updated against current sources.

I remember it like it was yesterday. The little bit of bitcoin I had mined with so much effort was now worth 3X what it had cost me to mine it. I was elated– I wanted more. More Bitcoin, more miners, more freedom. However, it was my only saleable asset at the time. I was torn - my only way to grow the business was to sell the new crown jewel of my portfolio. I had no choice. I felt like I wanted to vomit, but I still did it. It felt wrong, and I never wanted to sell bitcoin ever again.

In my desperate search for someone that would give me a loan with bitcoin as collateral, I realized that no one understood bitcoin as well as we did. 

No one saw it as the world’s greatest loan collateral asset, like we did. 

After being laughed out of a few rooms, Adam and I decided to solve our own problem and start Ledn, so that others could access financing without selling their bitcoin too. 

Explore Ledn’s current Bitcoin-backed loan terms →

That experience explains the problem this article addresses: turning Bitcoin wealth into working capital without an immediate sale. The perspective comes from a lender building a product, not a claim of independence. The following sections retain the original explanation of the funding trade-offs while updating the market examples.

RELATED CONTENT:  The Ultimate Guide to Crypto Lending

Before we get into a breakdown of the competitive landscape and offerings today, let’s review some background context on loans and a brief history of Bitcoin-backed loans.

On Loans & Balance

A purchase often settles the parties' economic exchange quickly: one party receives the item and the other receives payment. Actual payment settlement and reversal rules vary, but the contrast with an ongoing loan is useful.

Example: Miguel is happy to pay $10 for a sandwich because it would cost him more time or money to make it himself, and the Sandwich shop is happy to sell it at $10 (and pay an extra $1 to the credit card processing companies) because they can make the sandwich for $6. 

There’s a harmonious balance in the transaction above, and everybody wins. If all parties to the transaction don’t feel like they are being fairly compensated, the balance breaks. In other words, the sandwich shop doesn’t scale– or goes out of business.

A “loan” is also a type of financial transaction. There is a “seller” or supplier of capital, the lender– and there is a “buyer” or consumer of capital, the borrower. But it has one additional consideration, which is that a loan does not reach finality right away. It’s a long-term commitment that can go on for years. Because of this, it is even more important, and more challenging, to strike the right balance between the parties.

In the case of Bitcoin-backed loans, the lenders are those investors or institutions that provide the U.S. dollar liquidity in exchange for an interest rate, and borrowers are those bitcoiners who post their bitcoin as collateral to obtain the capital they desire, without having to sell their bitcoin.

My Precious

Collateral is one way lenders support repayment, but unsecured credit also exists: it relies on borrower credit and enforceable obligations rather than a particular pledged asset. Here the question is narrower—how to balance both parties’ interests when Bitcoin is collateral.

Lending has a long history, including systems of collateral and limits on interest. The modern design problem remains concrete: a capital provider wants a recovery mechanism and compensation for risk; a borrower wants useful funding at an acceptable cost without exposing valuable collateral to unnecessary risks. Those interests have to coexist for the full loan term.

The important thing to keep in mind here is that: For both the lender and the borrower, the capital at stake is “the most important asset in the world”. 

Dollar lenders need confidence in recovering dollars, while Bitcoin borrowers want a clear path to recovering their remaining BTC. Both should care about the source of funding, the collateral's liquidity and the agreement: a mismatch can affect either side during market stress.

As you can already see, reaching this balance is an art as much as it is a science.

In the bitcoin-backed lending industry, there have been several attempts to reach this delicate balance between lenders and borrowers. Some have scaled better than others, and some have failed to do so. At the end of this essay, you should have a better understanding of the industry dynamics and constraints that have led to those outcomes.

Finding Balance

The original article used this illustrative negotiation—not actual customer quotes or current offers—to show the competing preferences:

Lender: “I’m willing to lend you U.S. dollars. I’d like to hold 4:1 collateral to the loan amount, and full control and custody of the Bitcoin. I also need the ability to liquidate instantly when certain prices are triggered. The rate at which I could lend you money is 20% APR.”

Borrower: “I’d like to borrow dollars and keep full custody and control of my bitcoin. I’m willing to post 1:1 collateral to the loan amount,  and I need at least one week to come up with extra bitcoin collateral, as I have it in cold storage. The highest interest rate I am willing to pay is 5% APR.” 

One common model uses twice as much BTC collateral as principal at origination: 50% LTV. Ledn currently uses this typical starting point, a 12-month term, no required monthly payments and no early repayment penalty. Its pricing table lists APRs of 10.99% below $250,000, 10.49% from $250,000, 9.99% from $500,000, 9.75% from $1 million and 9.25% from $2 million. These figures describe Ledn, not an industry average. Liquidation rules vary by agreement.

Walk a mile in my shoes

I am a bitcoiner. Custody and control of private keys is and always has been a very important consideration for our team and I when designing our products. I’ll be the first to admit that collaborative custody, also known as multi-signature custody, is an awesome solution that Bitcoin enables. But, after years of building lending products on Bitcoin, I’ll also be the first to tell you that it’s a challenge to use collaborative custody for loan collateral. The reasons come back to the above– balance between the lender and the borrower. 

Consider the original article's role-reversal thought experiment: a Bitcoin holder lends value against dollars in an account that requires several parties to authorise transfers. Seeing the balance is useful, but the lender also needs an enforceable and operationally workable recovery process. The same distinction applies to BTC multisig. The number of signers matters, yet who can act together, under which conditions and how quickly matters just as much.

Whose Bitcoin is it Anyway?

A 2-of-3 arrangement requires two valid signatures to move coins. One signer cannot act alone, but two may be able to act without the third, depending on the structure. That is a technical-control question. Legal ownership, beneficial interests, accounting recognition and enforcement rights are separate questions answered by the contract and applicable law—not by counting keys alone.

Similarly, 'qualified custody' is a jurisdiction-specific legal and regulatory concept, not a synonym for a particular signature threshold. A multisignature arrangement can distribute operational authority without establishing the regulatory status of every party. Ask which entity provides custody, what status is relevant and how the loan agreement interacts with the signing policy.

Funding providers evaluate enforceability, liquidation execution, operational reliability and regulatory requirements. Those considerations can shape the availability and price of a multisignature loan, but it is too broad to say banks or institutions cannot fund this model. Current offerings from Unchained and Debifi demonstrate why the actual structure and lender matter more than a blanket conclusion about multisig.

Now lets cover the competitive landscape of bitcoin-backed loan offerings in the market today:

Three layers to examine

First, examine the technical controls: key storage, signing requirements, recovery procedures and transaction approval. Second, examine the people and operations behind those controls, including who can change permissions. Third, examine the contract: ownership, permitted reuse, segregation, default and insolvency treatment.

Multisignature and other signing arrangements can distribute control. They do not, by themselves, answer every legal or counterparty question. Equally, an institutional custodian's name does not describe all rights attached to a particular loan.

Compare the same questions across different models

An arrangement with multiple signing parties can distribute technical control without resolving every legal question. A familiar custodian can provide services without its name explaining all loan-specific rights. Apply the same questions to each model rather than assigning a winner from terminology.

Everything for Everyone

Like in any market, customers have different preferences. Companies compete to cater to different segments of the market, based on what they believe will help fulfill the company’s mission. 

At Ledn, our mission is to build the most transparent and honest lending solution that can make working capital accessible to bitcoiners worldwide, and to treat them equally! 

Ledn’s current approach centres on native-BTC collateral and a defined custodial funding arrangement. The historical choice between Standard and Custodied loans should not be read as a current product menu.

Under Ledn’s current Custodied Loan model, collateral may be re-posted to an institutional USD funding partner or a Ledn-sponsored and managed financing vehicle. It cannot be lent out to generate interest. The published model describes verifiable custody and legal ring-fencing from a funding partner’s assets, or a bankruptcy-remote financing structure. This is not a no-reposting promise. Collateral-use permission is distinct from custody: assets may remain in custody while pledged to support funding; lending them for yield is a different permitted-use question. The borrower transfers control for the loan, and the applicable agreement governs release, enforcement and insolvency treatment.

Unchained’s current commercial-loan offering uses multisig and states that collateral is not rehypothecated. Borrowers control a key and can verify collateral on-chain; that does not mean unilateral withdrawal. Its published minimums generally start at $150,000 for business entities and $500,000 for individuals, trusts and sole proprietors. It describes 12-payment terms with interest every 30 days and principal in the final payment. These access and cash-flow requirements are substantive differences from a product with no required monthly payments. Use the current quote for pricing and state eligibility.

Lend at Hodl Hodl is a peer-to-peer marketplace using multisig BTC escrow. Its current site advertises no verification or credit check, loan periods of one to 12 months and a 1.5% borrower origination fee. It currently describes crypto-to-crypto loans in supported assets including USDT, USDC, L-BTC and WBTC—not a direct fiat bank loan. The lender sends the agreed funds and releases collateral following repayment. Compare the individual offer, funding availability, location restrictions and dispute process; loan size and available funding depend on the offers and applicable platform limits.

Debifi is now operational, not an upcoming product. It connects borrowers with independent institutional lenders and describes dedicated 3-of-4 multisig escrow, no collateral re-lending, and supported fiat and stablecoin funding. Offers can have monthly, quarterly or annual interest schedules. Its key distribution and institutional funding model are different from a single lender’s product. Examine the selected lender, signature roles, repayment schedule, extension and liquidation provisions rather than assuming all marketplace offers are identical.

Another model combines multiple collateral assets with a platform loyalty programme. Nexo’s current Credit Line advertises BTC, ETH and more than 100 supported collateral assets, with borrowing rates starting at 1.9% per year subject to its conditions. An entry rate is not an unconditional quote for every balance or loyalty tier. Compare the actual portfolio, LTV, token requirements and offer; the historical list of 37 assets is not a current inventory.

The regulatory history should also be stated precisely. In January 2023, the SEC announced a settlement over Nexo’s unregistered Earn Interest Product: $22.5 million to the SEC plus $22.5 million to state regulators. That is not a finding that issuing a platform token itself caused the violation, nor proof of current product availability in every jurisdiction. Separately, a multi-asset collateral book must account for each asset’s liquidity and correlated price declines. Thin order books can make liquidation more difficult; the useful comparison is the actual risk-management framework, not a claim that every supported altcoin is illiquid.

And remember, regardless of which platform you decide to use, if you choose to use your bitcoin as collateral– don’t trust, verify! Take it upon yourself to diligence your platform(s) of choice. If you’re looking for some guidance, we’ve also put together a list of questions that you should ask your service provider here. 

Wrapped Bitcoin adds another set of questions

On-chain borrowing may use a token intended to represent Bitcoin. That adds an issuer or backing arrangement, token contract and redemption mechanism to the lending market's own dependencies. Identify those parties separately from the application used to borrow.

Read Ledn versus Morpho for a practical example of why the interface, collateral token and lending protocol should be assessed separately.

Test the arrangement against your planned exit

Suppose you expect to repay a loan and use the released BTC for another transaction. Confirm what counts as settled repayment, which checks apply and how the remaining collateral is returned. Do not commit the same collateral elsewhere while it is still pledged.

Ledn's native-BTC model can be relevant to someone who wants BTC rather than a wrapped representation as loan collateral. But native BTC in a loan is not unrestricted self-custody: the agreement governs movement and release. That practical constraint belongs alongside the model's potential appeal.

If a provider's explanation ends at “your assets are safe,” ask for the process and supporting rights. The outcome you need is a clear, documented path through funding, management and closure.

Verify the evidence

Ask for the agreement, relevant custody explanation, recent reports and a clear collateral-release process. Review the scope of Proof of Reserves and the Open Book Report. Check which assets, liabilities and dates each report covers.

Hodl!

Availability: Ledn’s product access, supported funding routes and purpose requirements vary by jurisdiction. Canadian and U.S. customers should use current account and eligibility information rather than historical 2023 Savings Account migration notices.

Geographic scope: Products are not offered where prohibited. Access depends on applicable restrictions and the agreement offered to the borrower.

This article is intended for general information, educational and discussion purposes only, it is not an offer, inducement or solicitation of any kind, and is not to be relied upon as constituting legal, financial, investment, tax or other professional advice. This article is not directed to, and the information contained herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to law or regulation or prohibited by any reason whatsoever or that would subject Ledn and/or its affiliates to any registration or licensing requirement. This article is expressly not for distribution or dissemination in, and no Ledn product or service is being marketed or offered to residents of, the European Union, the United Kingdom, the United States of America or any jurisdiction in Canada, and such product or service may only be marketed or offered in such jurisdictions pursuant to applicable laws or reliance on regulatory exemptions. A professional advisor should be consulted regarding your specific situation. Digital assets are highly volatile and risky, are not legal tender, and are not backed by the government. The information contained in this publication has been obtained from sources that we believe to be reliable, however we do not represent or warrant that such information is accurate or complete. Past performance and forecasts are not a reliable indicator of future performance. Any opinions or estimates expressed herein are subject to change without notice. This article may contain views or opinions of the author that do not necessarily reflect the opinions, standards or policies of Ledn. We expressly disclaim all liability and all warranties of accuracy, completeness, merchantability or fitness for a particular purpose with respect to this article/communication. Read our Disclaimers.