Bitcoin-backed stablecoins just got real — but tax rules still point some to custodians
Users can mint a dollar-denominated stablecoin, retain upside to BTC and use the borrowed funds elsewhere
Liquity/Almerra/Shutterstock and Adobe modified by Blockworks
This is a segment from the 0xResearch newsletter. To read full editions, subscribe.
The long-awaited relaunch of Liquity v2 this month — after an unfortunate bug scuttled the first deployment — marked a major step forward for decentralized, censorship-resistant borrowing. However, it’s limited to ETH, stETH and rETH as collateral.
To expand collateral options, “friendly forks” are encouraged. Two promising new Bitcoin-backed stablecoins are launching with Liquity’s tech: Alpen Labs’ Bitcoin Dollar (BTD) and Asymmetry’s USDaf.
Built around Liquity’s battle-tested, governance-free model, v2 brings improved capital efficiency and user-set interest rates in addition to new collateral types. Importantly, it extends the original protocol’s strict censorship minimization ethos to new blockchains, including Ethereum and Bitcoin layer-2s, through licensing agreements.
Bitcoin lending has historically been dominated by custodial platforms like BlockFi, Celsius and Ledn, where users surrendered their BTC in exchange for dollar liquidity — often at the cost of transparency, flexibility or sometimes, well, solvency. The latest option, presented in Las Vegas at Bitcoin2025, is from Bitcoin payments company Strike, which offers Bitcoin-backed loans at interest rates between 9-13% — typical for custodial lenders.
Compared to centralized services, the DeFi alternatives offer much better terms.
Asymmetry’s offering, which is live on Ethereum mainnet, accepts tBTC, wBTC and cbBTC at max LTVs above 80%, with borrowing rates currently between 4.2% and 7.1% APR.
Alpen’s BTD, while not yet live on mainnet, aims to do the same using native BTC collateral (eventually via BitVM bridges) in a zero-governance zk rollup, according to CEO Simanta Gautam.
“We’re building a Bitcoin-native, censorship-resistant stablecoin — not another wrapped token or federated bridge,” Gautam told Blockworks.
The BTD will be immutable from day one, and will launch with no governance token or admin keys — much like Liquity itself. That’s unusual among Liquity v2 forks, which typically promise tokens to Liquity’s own BOLD stablecoin liquidity and stability providers.
Even non-Liquity options like Mezo, which launched mainnet this week, offer Bitcoin-backed loans at 1% fixed interest — though users give up custody and flexibility to take advantage. The MUSD stablecoin is only useful via integrated partners in the Mezo Market.
The clear advantages of the decentralized model are capital efficiency, lower interest rates and potentially the elimination of custodial risk. For advanced users looking to allocate new capital to bitcoin, there’s little reason to use a custodial lender.
But there’s one major caveat: tax treatment.
In most jurisdictions, converting native BTC into a non-native version (like LBTC or tBTC) is treated as a taxable disposal. So while borrowing itself is not taxable, the act of moving BTC into a DeFi protocol may trigger a capital gains event. That’s where custodial lenders like Strike and Xapo still hold an edge — by allowing BTC to remain untouched while serving as collateral, they preserve favorable tax treatment for long-term holders.
There’s a third category emerging that may offer a middle ground: Babylon’s native Bitcoin staking, which locks BTC for yield but doesn’t create a derivative or require asset exchange. It’s still early, but that model could offer both yield and tax efficiency — without giving up self-custody. On the other hand, it’s not a stablecoin you can spend elsewhere, and the BTC income may be subject to tax like any other.
Sure, custodians also offer simplicity and customer support, and many BTC holders are simply not comfortable managing private keys or assessing smart contract risk. But for the majority of crypto-native users, those factors are far outweighed by the better terms, higher LTVs and greater transparency offered onchain.
As the infrastructure matures — and trust-minimized bridges like BitVM gain traction — the most attractive option for Bitcoin-backed borrowing may soon be the one that best aligns with Bitcoin’s own principles: decentralized, censorship-resistant and user-controlled.
If BTD can be minted against bitcoin in a native BitVM bridge, one could make a strong argument that the tax treatment should be the same as it is with a custodial lender like Strike. That might be the best of both worlds, but we’re not quite there yet.
Get the news in your inbox. Explore Blockworks newsletters:
- The Breakdown: Decoding crypto and the markets. Daily.
- 0xResearch: Alpha in your inbox. Think like an analyst.
- Empire: Crypto news and analysis to start your day.
- Forward Guidance: The intersection of crypto, macro and policy.
- The Drop: Apps, games, memes and more.
- Lightspeed: All things Solana.
- Supply Shock: Bitcoin, bitcoin, bitcoin.
