There’s been talk about people buying real estate with cryptocurrency for some time, but a new report from banking giant Citi finds that crypto-backed mortgages have been gaining ground for reasons that suggest loans collateralized by digital assets will have a growing place in the broader lending market.
Noting that it is “rare to find ‘new’ types of mortgages in the post-crisis U.S. mortgage finance market,” Citi Global Perspectives & Solutions’ (GPS) “Home of the Future” report said that a “new crypto- adjacent mortgage product has gained prominence with a straightforward motivation: Allowing crypto investors to utilize their investment gains to secure a loan without incurring” capital gains tax liability by selling cryptocurrency to pay for property, and without parting with the digital assets many large crypto holders hope will rise dramatically in value over the long term.
The way these mortgages work is fairly similar to the way decentralized finance, or DeFi, lending/borrowing platforms work: Put up crypto as collateral for the loan — whether that’s stablecoins in DeFi or a mortgage in the housing market.
Among the benefits in the mortgage market is that people who live off crypto investments are basically locked out of Fannie Mae and Freddie Mac — which is to say, locked out of the traditional mortgage lending market.
One difference is that Citi found that mortgage loans generally require “crypto deposits at least equal to the purchase price to be transferred into a custodial account,” while DeFi lenders generally want between 125% and 150% collateral to account.
Mortgage loans generally have margin calls to avoid liquidation — and potentially foreclosure — if the collateral’s value falls below a certain line, say 35% of the loan’s value, whereas DeFi loans generally liquidate if the value approaches the full value of the loan.
The same principle is being applied to secured personal loans by a number of centralized crypto lending firms, including SALT Lending ($5,000 minimum) and Unchained Capital ($10,000 minimum), which unlike some other consumer-facing crypto lenders, offer cash loans rather than stablecoins.
Ledger, maker of the Nano secure digital wallet — the leading hardware “cold” wallet — has teamed up 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.
But, the card — which is signing up potential users to a waitlist — will also offer loans based on that crypto balance. They will have a 30-day window to repay without interest. So while it’s not exactly a secured card, it can work in much the same way from a user perspective.
The problem with this type of collateralized loan is seen in the fate of two other crypto lenders that offered direct individual loans: Celsius and BlockFi. Celsius is insolvent and BlockFi barely escaped it, and both froze collateral withdrawals while they went through financial crises as companies they’d lent hundreds of millions of dollars to defaulted this month.
While BlockFi was bailed out and may be acquired, Celsius is facing Chapter 11, and crypto depositors have no special status as creditors in a bankruptcy liquidation. Without FDIC insurance, steep losses are possible.
Big Tax Benefits
This type of loan has several benefits, starting with a twist on the same capital gains tax issue that crypto mortgages solve.
In brief, bitcoin is considered a commodity, and all other cryptocurrencies are arguably — and it is hotly argued — either securities or commodities.
But either way, any time you sell cryptocurrency you are liable for capital gains tax — even if you sell it via a crypto debit card to buy a cup of coffee. Aside from the additional tax burden, the paperwork involved in simply figuring out the size of the capital gain and filing with the IRS make small-scale crypto spending difficult — at least in theory, as the issue hasn’t really come up from a tax perspective. But it’s enough of a problem that the Senate is weighing a crypto regulation that would exclude purchases up to $200.
However, once you get into debit- or credit-card spending, that’s a limit easy to breach — dinner for two with wine would surpass it in many cities.
With a loan of some kind, whether a personal loan, revolving credit line 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.