Aave is proposing a custodied-collateral lending model that would let institutions borrow USDC on Aave V4 against Bitcoin held by the regulated custodian Anchorage. The Bitcoin would remain in Anchorage's custody, while Chainlink's CustodySync and Custodied Collateral Tokens would represent the assets on-chain for use in Aave lending markets. Under the proposed structure, an institution such as a hedge fund would transfer Bitcoin to Anchorage. The custodian would support the issuance of non-transferable Custodied Collateral Tokens, which could then be deposited on Aave as collateral. After the borrower repays principal and interest, the tokens would be burned and the Bitcoin unlocked and returned. The design aims to remove the need to convert institutional Bitcoin into alternatives such as wrapped Bitcoin, thereby reducing related smart-contract, compliance and security risks. Aave founder Stani Kulechov described the plan as a first-of-its-kind effort to connect regulated custody with on-chain lending. Aave says institutions currently cannot use assets held with regulated custodians as collateral in DeFi because custody systems and lending protocols operate independently. The proposal remains subject to backing and a Snapshot vote before any eventual execution, and its progress could influence whether other lending protocols such as Morpho and Kamino adopt similar models. Aave's total value locked was cited at $19 billion, up from $12.5 billion in June, representing a 52% recovery. The initiative is separate from Aave's proposed Avalanche V4 RWA Hub, which would support lending against eligible tokenized financial assets, and from Horizon, Aave's institutional real-world-asset market on Ethereum.