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Banking Services Transformation: Unlocking Exponential Value
Highlights
- While this is a path leading and futuristic step to be ready for the digital generation, it needs to be closely reviewed and understood for its implications and regulatory fitment.
- It’s also important to note that the mortgage aspect is just one piece of the larger cryptocurrency regulatory implication in the US and there are other federal agencies as well that would play a substantial role, which needs to be reviewed from a larger perspective and see how it will span out in the intensively regulatory landscape for the US.
- Consider the views from other US federal agencies as well that would play a substantial role. Evaluate the outlook and take appropriate steps to formulate the way ahead.
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Current Landscape
Cryptocurrency could not be used to qualify for a mortgage application. If cryptocurrency is to be used, it had to be liquidated into US dollars and held in an eligible asset account with documented evidence of the transaction.
FHFA (Federal Housing Finance Agency) has directed the major secondary investors to develop proposals for how cryptocurrency holdings can be considered as assets in mortgage applications. Fannie Mae and Freddie Mac to develop proposals for how cryptocurrency holdings can be considered as assets in mortgage applications. Since this may be the first time borrowers would be able to use cryptocurrency while applying for home loans it would open doors and could make it easier for those with digital assets to qualify and use crypto for a mortgage. Under the new directive, borrowers may no longer be required to liquidate their digital assets into USD to qualify for a home loan. They could potentially list eligible crypto holdings alongside traditional assets like stocks or bonds. A crucial distinction is that only crypto assets evidenced and stored on a US-regulated centralized exchange will qualify, while crypto’s in private wallets or offshore exchanges will not.
While Cryptocurrencies contribute to reducing cash handling risk with faster transactions & lower costs, blockchain technology ensures encrypted tamper proof transactions and verifiable transaction history promoting broader economic participation. However, it’s also important to note that the mortgage aspect is just one piece of the larger cryptocurrency regulatory implication in the US and there are other federal agencies as well that would play a substantial role, which needs to be reviewed from a larger perspective and see how it will span out in the intensively regulatory landscape for the US.
Pricing Evolution
Multi trillion cryptocurrency economy cannot be ignored and is gaining popularity day by day
While Fannie Mae and Freddie Mac would draft proposals on how they plan to review crypto assets. These proposals will need to be approved by their respective boards of directors and the FHFA before any changes can take effect. This process will involve careful consideration of the inherent volatility of cryptocurrencies and the need to safeguard the broader financial system.
This is a dynamic area, and further developments are expected as regulators and the industry work to integrate digital assets into traditional financial systems.
Challenges
US banking and mortgage has an intensive regulatory landscape. Before implementing cryptocurrency, it needs to be closely reviewed and understood for its implications and regulatory fitment.
Fannie Mae and Freddie Mac are instructed to consider risk mitigants, such as adjustments for market volatility and capping the percentage of a borrower's assets that may be comprised by cryptocurrency. This indicates that lenders will likely apply substantial discounts to the stated value of crypto holdings and require additional documentation.
Prior to this directive, the consensus among many mortgage lenders was to avoid crypto due to its volatility and murky regulatory landscape. However, some non-agency lenders (those not backed by Fannie Mae and Freddie Mac) have already been exploring crypto-backed mortgages.
Historically, if cryptocurrency was to be used for a down payment or reserves, it had to be liquidated into US dollars and held in an eligible asset account for a period (e.g., two months), with documented evidence of the transaction. Income paid in cryptocurrency could not be used to qualify for a mortgage application and the monthly payments on debts secured by cryptocurrency had to be included in the borrower's debt-to-income ratio.
While this is a path leading and futuristic step to be ready for the next generation, it needs to be closely reviewed and understood for its implications and regulatory fitment. Additionally, there are other federal agencies as well that would play a substantial role, which needs to be reviewed from a larger perspective and see how it will span out in the intensively regulatory landscape for the US.
- Securities and Exchange Commission (SEC): Regulates cryptocurrencies classified as securities.
- Commodity Futures Trading Commission (CFTC): Classifies Bitcoin and Ethereum as commodities and supervises their derivatives and futures contracts.
- Internal Revenue Service (IRS): Considers cryptocurrencies as property for tax purposes, meaning transactions are subject to capital gains taxes. Strict record-keeping is required.
- Office of the Comptroller of the Currency (OCC): Manages national banks' involvement in crypto-related activities and has issued guidance on risk management for banks holding crypto assets on behalf of customers.
- Financial Crimes Enforcement Network (FinCEN): Focuses on anti-money laundering (AML) and know-your-customer (KYC) compliance for crypto exchanges.
Solution
All possible views/ proposals would need to get reviewed and approved by the FHFA before any changes can take effect.
While this is an important and notable move as Fannie Mae and Freddie Mac purchase and securitize a major portion of US Mortgage loans and their guidelines have a wider impact on the entire US Mortgage industry. While this is a path leading and futuristic step to be ready for the next generation, it needs to be closely reviewed and understood for its implications and regulatory fitment.
There are ongoing efforts in the US Congress to establish a more comprehensive regulatory framework for digital assets. For example, the Digital Asset Market Clarity Act (Clarity Act) aims to establish a regulatory framework for digital assets, and the Guiding and Establishing National Innovation for US Stable coins Act (GENIUS Act) aims to create a federal regulatory framework for payment stable coins. These legislative efforts aim to provide more clarity and potentially cement the legal basis for treating crypto assets as legitimate components of a person's financial profile.
Conclusion
Cryptocurrencies contribute to reducing cash handling risk with faster transactions & lower costs, blockchain technology ensures encrypted tamper proof transactions and verifiable transaction history promoting broader economic participation.
Hence getting into the crypto space with an advantage of building a stable and faster liquidity with transparent and safe financial regulations and an easy to buy, sell, and exchange globally without significant risk of volatility will get more popular and would ensure acceptability and help global trade become much easier & faster.