3 Implications Of Crypto Backed Mortgages For Investors
Sound money is coming to the mortgage market
As the cryptoasset industry continues to accelerate and achieve wider mainstream adoption, one aspect of the financial conversation has remained excluded; the U.S. housing market. While bitcoin backed mortgages did make a splash in the past the number of U.S. mortgage applicants that have actually leveraged crypto remained a miniscule percentage of the total market. Mirroring the broadening acceptance of crypto across the U.S. banking system, the approval of crypto initiatives at the U.S. and federal level, and the deployment of crypto and blockchain services across the TradFi sector the recent movement out of the FHFA should not come as a surprise to the crypto landscape. Not a surprise but a development that can potentially unlock an entirely new aspect of crypto ownership that – to date – had remained untapped.
Previously Fannie Mae and Freddie Mac both required that cryptocurrency holdings be exchanged into U.S. dollars and for these proceeds to be held in a U.S. or state regulated financial institution to be considered for collateral purposes. In other words under current policies U.S. investors who own cryptoassets had to sell, incur tax liabilities, and then deposit at specified institutions in order to have these funds counted for mortgage loan purposes. The announcement that both mortgage giants will now accept bitcoin and other cryptocurrencies as reserves during the risk assessment process is a significant step forward for further mainstream adoption.
Changing these requirements can potentially produce several implications for investors that need to be taken into account moving forward.
Crypto Continues Its Mainstream Adoption
One of the core criteria that support assets that differentiates the U.S. dollar, U.S. Treasuries, and precious metals such as gold from other investments/assets is that the former are almost universally treated as top tier collateral for transactions involving leverage. Waiting on the IRS to alter the criteria by which it judges and evaluates cryptoassets will be an endeavor requiring significant patience, but the utilization of bitcoin and other cryptoassets as the equivalent of dollars for collateral purposes is a substantial step forward in further adoption.
One additional point that is worth mentioning is that, as institutions as large as JP Morgan introduce products that are hybridized demand deposits/stablecoins it would seem logical to conclude that an increasing percentage of U.S. dollar demand deposits (savings accounts) will also incorporate some aspect of tokenization. Tweaking criteria to appropriately account for these savings and investments, which if now denominated in any cryptoasset or token would necessitate a sale, can help unlock liquidity for U.S. crypto investors.
Sound Money For Housing
As the prices of houses has continued to increase in nominal terms, which represents a legitimate and ongoing source of political and economic consternation for investors, taxpayers, and policymakers alike, an alternative method of pricing and valuation has continued to emerge. When bitcoin and other cryptoassets were only owned by a small percentage of the overall investing marketplace the concept of pricing housing and other assets in bitcoin or cryptoassets would have seemed far-fetched at best and a potential waste of time and investing energy at worst.
This has continued to change, however, and the permeation and integration of cryptoassets within the economic landscape has continued to increase. For example, the price of a median house in bitcoin, as per the Bitcoin Inflation Index, continues to hit all time lows even as nominal prices have reached all-time-highs. Outside of the obvious and short-term economic benefits this represents for current bitcoin owners, the incentive structure surrounding bitcoin (and potentially other cryptoassets) could begin to pivot from one of speculation to one of saving prioritization.
Such an approach also mirrors some of the original tenants embodied in the original bitcoin blockchain whitepaper; sound money, a prioritization of savings, and less dependence on price speculation for economic returns.
Potential Tax Policy Changes
A substantial obstacle to wider adoption of utilization of cryptoassets and cryptocurrencies is the tax treatment of said assets. At this point every transaction, exchange, transformation, or other transfer that involves said assets will incur at least a tax reporting obligation if not a tax payment obligation. Given the change in which assets will be counted as reserve assets for collateral purposes, there is an opportunity for a policy tweak that would enhance the changes out of the FHFA.
Since bitcoin and other cryptoassets can now be used as collateral for mortgage purposes it stands to reason that other use cases for crypto assets – student loans, auto loans, etc. – might also follow suit. As investors now need not engage in a forced sale of assets to make use of savings denominated in crypto for mortgage purposes, other large purchases (and the regulatory bodies therein) should take note as to how similar policies could be implemented in other areas.
Crypto continues to expand, and crypto-backed mortgages are just the beginning.
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