Crypto-backed mortgages, loans are gaining traction
People have been talking about buying property with cryptocurrency for some time, but a new report from banking giant Citi finds that crypto-backed mortgages are on the rise for reasons that suggest digital asset-backed lending has a growing place in of broader lending will take market.
Noting that it is “rare to find ‘new’ types of mortgages in the post-crisis US mortgage financing market,” Citi Global Perspectives & Solutions’ (GPS) Home of the Future report states that a “new crypto-adjacent mortgage product has gained prominence with a simple motivation: to allow crypto investors to use their investment gains to secure a loan without incurring a capital gains tax liability by selling cryptocurrency to pay for real estate and without divesting itself of digital assets that many large crypto owners hope will dramatically increase in value over the long term.
The way these mortgages work is quite similar to how decentralized finance or DeFi lending/borrowing platforms work: post crypto as collateral for the loan – whether that’s stablecoins in DeFi or a mortgage on the housing market.
One of the perks of the mortgage market is that people who thrive on crypto investing are essentially locked out of Fannie Mae and Freddie Mac — that is, locked out of the traditional mortgage market.
One difference is that Citi noted that mortgage loans generally “require crypto deposits equal to or greater than the purchase price to be deposited into a custody account,” while DeFi lenders generally require between 125% and 150% collateral.
Mortgage loans generally have margin calls to avoid liquidation – and possibly foreclosure – when the value of the collateral falls below a certain limit, say 35% of the loan’s value, while DeFi loans are generally liquidated when the value approaches that approaching the full value of the loan.
The same principle is applied to secured personal loans by a number of centralized crypto lenders, including SALT Lending (minimum $5,000) and Unchained Capital (minimum $10,000), which offer cash loans instead of stablecoins, unlike some other consumer-facing crypto lenders.
Ledger, maker of the Nano Secure Digital Wallet — the leading “cold” hardware wallet — has partnered with London-based fintech Baanx Group to create a Visa debit card that will allow users to spend the crypto stored on their Nano wallets be able.
See more: PYMNTS Crypto Basics Series: What is a Crypto Wallet
But the card – which puts potential users on a waiting list – will also offer credit based on that crypto balance. You have a 30-day window to pay them back with no interest. While not exactly a secured card, it can work the same way from a user perspective.
The problem with this type of secured loan is seen in the fate of two other crypto lenders that have offered direct individual loans: Celsius and BlockFi. Celsius is in default and BlockFi narrowly escaped, and both have frozen collateral payouts while navigating financial crises as companies to which they lent hundreds of millions of dollars defaulted this month.
See Also: Crypto Companies Seeking Rescuers Find Wolves In Sheep’s Clothing Instead
While BlockFi has been bailed out and is available for purchase, Celsius faces Chapter 11 and crypto depositors have no special status as creditors in a bankruptcy liquidation. Without FDIC insurance, high losses are possible.
Big tax benefits
This type of loan has several advantages, starting with a twist on the same capital gains tax problem that crypto mortgages solve.
In short, bitcoin is viewed as a commodity, and arguably all other cryptocurrencies are — and it’s been hotly argued — either securities or commodities.
See here: Gensler pushes crypto #2 status into regulatory limbo
But either way, every time you sell cryptocurrency, you’re subject to capital gains tax — even if you’re selling it through a crypto debit card to buy a cup of coffee. Aside from the added tax burden, the paperwork associated with simply determining the amount of the capital gain and filing it with the IRS makes small crypto spend difficult — at least in theory, since the issue didn’t really arise from a tax perspective. But it’s already a problem enough that the Senate is considering crypto regulation that would bar purchases up to $200.
Also Read: Senate Crypto Bill Debuts and Crypto Industry Makes Big Gains
However, once you start spending with debit or credit cards, that limit is easy to surpass — dinner for two with wine would surpass it in many cities.
With any type of loan, be it a personal loan, revolving line of credit, or secured card, that wouldn’t be a problem unless you pay the monthly balance with crypto. And even then, 12 annual capital gains reports are a lot easier than hundreds or thousands.