Who would have ever thought that a collection of binary data stored in a ledger using cryptography can be used to make monthly mortgage payments? Cryptocurrency made its ingress in the US mortgage industry when the second-largest mortgage lender in the country accepted the first mortgage payment in cryptocurrency. This was a pilot run to look into the incremental and regulatory uncertainty in the cryptocurrency space. While the experiment was on mortgage payments, there could be other areas where cryptocurrency can be a game-changer.
Is cryptocurrency a liquid asset?
Technically, cryptocurrency is a liquid asset that can be converted into cash. However, whether it can be listed as a liquid asset for a down payment, closing cost, and reserves requirement while filling mortgage applications is a million-dollar question. (It could be a million-bitcoin question in the future.) Till now, lenders have only been accepting typical liquid assets like cash at banks, individual retirement accounts (IRA), and money market funds to underwrite a mortgage application. The way we see it, lenders may start viewing cryptocurrency holdings like stocks, but it would only be a certain percentage of their market value.
How about down payments?
Borrowers can cash out their cryptocurrency holdings for down payment requirements, but that attracts major tax liabilities. Even if a lender accepts it, there are certain pre-requisites to get the fund transferred to the US account prior to the loan application with a clear paper trail.
Exploring cryptocurrency options for mortgage payments
The conventional way of mortgage payments has been through online banking, electronic checks, paper checks, escrow accounts, and standing instructions for auto debits. When it comes to cryptocurrency, it is stored in an electronic wallet that has a secret pin to send and receive payments. To make cryptocurrency payments mainstream, technological advancement in the fintech space is required for creating a platform that can bring escrow accounts, mortgage accounts, and cryptocurrency wallets under one roof. We envision an amalgamated platform for money movement that can convert blockchain-based cryptocurrency into digital money, which can be transferred to escrow accounts for mortgage payments.
Cryptocurrency as reserves
Cryptocurrency’s volatility makes it the most speculative asset that one can hold. Ten thousand dollars’ worth of cryptocurrency may have a value of USD100,000 next year, or it could be USD1,000. Typically, a mortgage is taken for 20–30 years, with an average of 2.5 years of holding before refinancing. A lender must consider the risk of accepting cryptocurrency value as on date to secure future mortgage payments.
Volatility and attached tax liability
With a history of over 11 years, cryptocurrency’s market value fluctuates every day and is entirely driven by demand and supply. Unlike any other currency, it is not officially backed by any government. Also, since it is not reinforced by any collateral or promissory note, there is no strong metric to calculate its absolute value, and it is solely traded on the price that one is willing to either buy, sell, or both.
Capital gain tax is another element that makes cryptocurrency less appealing. This tax ranges between 0–20%. If one wishes to cash out cryptocurrency to make a monthly mortgage payment, it will attract tax liability on the increased value from the time of original purchase.
Cryptocurrency—A future bubble or revolution?
A USD2 trillion cryptocurrency economy is impossible to ignore. Buying and investing in cryptocurrency is becoming popular among millennials. A great number of digital mobile applications and trading platforms are coming forward to attract the youth and make trading simple, seamless, and secure. There are countries where cryptocurrency has crept into real estate for buying and selling properties, including cross-border transactions.
Having said that, there is still a long way to go to shift the momentum in this space. A plethora of new platforms need to be designed and integrated for the smooth movement of money, especially between different markets. Further, taxes may evolve, with the Internal Revenue System (IRS) analyzing this new asset class.
Overall, there is a paradigm shift in this space that reflects a continuous increase in the value of cryptocurrency, backed by mainstream adoption. Inevitably, a time will come when cryptocurrency will have a persuasive place with a more regulated framework in the financial world.