What is Coinbase’s cbBTC token?

cbBTC is Coinbase's new wrapped Bitcoin token which is backed by Bitcoin at a 1:1 ratio and allows cross-compatibility. Learn more in our cbBTC guide.

Bitcoin remains the market-leading crypto, but its original design is limited in comparison to emerging DeFi ecosystems. To bridge this gap, wrapped Bitcoin tokens have emerged, enabling the vast value of Bitcoin to be utilized within newer DeFi protocols.

We’re covering the basics of wrapped Bitcoin, and the introduction of Coinbase’s cbBTC in this guide. 

Read next: What are Wrapped Coins?

Wrapped Bitcoin basics

Wrapping Bitcoin involves securing it within a smart contract and issuing an equivalent token on a different blockchain. This process facilitates cross-chain compatibility, allowing users to transact or transfer assets on one blockchain while the original asset remains securely held on another.

Consider wrapped Bitcoin as a high-security digital vault. When you wrap your Bitcoin, it's stored safely, and you receive a token representing your claim, which can be utilized across various platforms. This token is always redeemable for your original Bitcoin, offering enhanced versatility.

Common uses for wrapped Bitcoin include:

• Accessing DeFi protocols: Platforms such as Aave or Compound offer opportunities to earn passive income. By utilizing wrapped Bitcoin, you can participate in these platforms without liquidating your original holdings.

• Accelerated transactions: Ethereum's proof-of-stake mechanism ensures transactions that are both faster and more cost-effective than those on the Bitcoin network. Utilizing wrapped Bitcoin can thus expedite and reduce the cost of your transactions.

• Leveraging smart contracts: Smart contracts underpin a wide range of technologies, from DeFi platforms to Web3 applications. Wrapping Bitcoin allows you to engage with these technologies without parting with your original assets.

While wrapped tokens enhance interoperability, cross-chain bridges have also gained popularity, enabling the transfer of assets between blockchains. However, security concerns have arisen due to incidents of bridge hacks leading to significant losses.

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Coinbase cbBTC token

Coinbase Wrapped BTC (cbBTC), is an ERC-20 token backed 1:1 by Bitcoin held in custody. As an ERC-20 token, cbBTC can be transferred on the Ethereum network and is expected to extend to other compatible blockchains in the future.

Currently, cbBTC is accessible to Coinbase users with active accounts in select regions, including the U.S. (excluding New York State), the UK, European Economic Area countries (excluding Germany), Australia, and Brazil. Eligible users can acquire cbBTC through Coinbase Wallet or other supporting third-party exchanges.

wBTC vs. cbBTC

Launched in 2019, wBTC was the first wrapped Bitcoin product and currently boasts a market cap of more than $12 billion with over 120,000 tokens in circulation. Developed collaboratively by industry leaders including BitGo, Ren, Dharma, Kyber, Compound, MakerDAO, and Set Protocol, wBTC aimed to infuse the Ethereum network with liquidity by tapping into the deeper Bitcoin market.

Recently, BitGo entered a joint venture with BiT Global, a Hong Kong-based custody platform partially owned by Tron and its founder, Justin Sun. This move has sparked debate, especially given that the Securities and Exchange Commission (SEC) previously charged Sun and his companies with conducting unregistered securities offerings and market manipulation.

While an SEC indictment doesn't inherently indicate malicious intent, the commission alleged that Sun orchestrated over 600,000 wash trades to fabricate trading activity, subsequently profiting more than $30 million from the inflated token prices.

In response, Sun described himself as a strategic investor in the new venture. Moreover, wBTC undergoes regular audits and ensures all on-chain transactions and verifications are transparent on both the Bitcoin and Ethereum networks, allowing users to independently verify transactions and detect potential fraud.

To date, reactions to the joint venture have been subdued. The partnership doesn't entail technical alterations to wBTC, and data regarding underlying reserves remains accessible on-chain. On-chain metrics indicate stability in wBTC's supply, suggesting that users aren't hastily withdrawing from the token.

As for cbBTC, despite its generally positive reception, some users have raised concerns regarding the token's terms of service. Specifically, there are questions about Coinbase's liability in scenarios involving malicious activities or unforeseen events that might lead to Bitcoin losses, suggesting that users might only recover a proportional share of the remaining assets.

Paul Grewal, Coinbase's Chief Legal Officer, addressed these concerns by affirming the company's commitment to reimbursing clients for any Bitcoin losses resulting from malicious actions or unforeseen events. However, he clarified that this commitment does not extend to additional fees or losses arising from loan liquidations or other adverse events related to cbBTC transactions.

Read next: How to Make Money on Coinbase

Wrapped Bitcoin tax implications

The tax treatment of wrapped tokens remains a gray area as there’s no existing IRS guidance. It's uncertain whether wrapping a token constitutes a "sale" of the original asset, which could trigger Capital Gains Tax.

A cautious approach treats wrapping as a crypto-to-crypto exchange, meaning every time you wrap or unwrap a token you’ll have a gain or loss based on the asset's value change since acquisition.

Alternatively, a more aggressive approach views wrapping as a continuation of holding the same asset, thereby not triggering a taxable event. However, if the IRS issues guidance contradicting this perspective, taxpayers might face back taxes and potential penalties.

Koinly simplifies this process by connecting to your wallets and exchanges, consolidating your transactions, and calculating your capital gains or losses, including for wrapped tokens. Best of all, it’s completely free to sign up and try it today.