As cryptoassets continue to become increasingly integrated into mainstream financial conversations, financial markets, and are adopted by financial institutions, it is simply a matter of time before more sophisticated financial instruments make their debut. Even while bitcoin and crypto exchange traded funds (ETFs) continue to languish under regulatory review, other products and services have raced ahead. Decentralized finance (DeFi), non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs) are just a sampling of the blockchain related asset classes that have dominated market conversation since 2021. Add in the discussions around Web 3.0 and the tokenization of both virtual and physical assets, and the result is a potent whirlwind of crypto conversation.
One such instrument that might be flying under the collective radar of market participants, however, is the potential for bitcoin and other cryptoassets to play a role in the mortgage and broader debt-collateralization space. With housing prices on a red-hot streak upward during the last several years – causing echoes of concerns last voiced in 2007 – the intersection of crypto and real estate has also been on the rise.
Let’s take a look at some of the major trends driving this convergence of crypto with real estate, and what investors should keep an eye on moving forward.
The future is now. On the surface the convergence of cryptoassets and mortgage financing might seem like a futuristic pairing, but the reality is that blockchain and real estate are already coming together. From straight forward cases of individuals buying real estate using cryptocurrencies, to NFTs playing a role in reducing paperwork linked to title and title insurance, to blockchain serving a key role in the record keeping process, the implications for real estate are substantial.
In addition to these connections, as significant as they are, the potential for crypto collateralized mortgages is still an emerging use case that remains untapped at large scale. NFTs have a very real role to play in tokenizing the ownership of real estate assets, and are already moving far beyond simply being relegated to crypto art speculation. Mortgages secured by crypto are a logical next step in the maturation of cryptoassets, but as with any instrument the specifics will vary.
Details will vary. Neither mortgages nor crypto are a simple market to understand, and especially when combining complex topics it is critical that the specific details of every transaction are examined. The crypto mortgage market is no exception to this rule, as several different options are available for potential buyers looking to collateralize a purchase using previously acquired cryptoassets.
For example, there are options that require 100% of the requested financing to be collateralized by crypto holdings; a $1 million mortgage loan would require $1 million of crypto as collateral. Other options allow customers to borrow against crypto holdings to produce a down payment, and to finance the remainder of the mortgage using conventional means.
On top of the borrowing specifics, investors and borrowers should also research the process that occurs if the value of collateral drops below a pre-determined level. Are the cryptoassets held on deposit at the crypto mortgage lender, or at a trusted third-party? If the price of this collateral breaches a certain level, is the crypto liquidated or does the borrower have an opportunity to make additional collateral deposits? With volatility a common characteristic of financial assets, including crypto, these are not idle concerns.
Custody matters. Building on the previous points, a question that needs to be asked is what entity has custody over the cryptoassets being used as collateral? Bitcoin BTC maximalists and other proponents of self-custodianship will most likely not partake in this financialization, but other crypto investors would be well served to understand just where the cryptoassets are being held. Additional factors to consider are where the custodian is located, what measures are in place to safeguard customer assets, are specific crypto related insurance policies in place at the organization, and has the entity undergone any formal review or attestation of these procedures?
For example, if a crypto investor chooses to not only collateralize a mortgage using cryptoassets, and therefore transfers custody to some external party, but also documents this transaction using an NFT, understanding provenance and custody are essential. With the number of decentralized exchanges and new entrants in the space conducting proper due diligence is an essential step for every investor to conduct.
Real estate and real estate linked financial products are clearly are becoming increasingly influenced by the growing prominence of cryptoassets in mainstream financial markets. There are several underlying use cases that different types of blockchain-based applications can bring in order to improve the current state of real estate transactions. As always, the potential and opportunity of these transactions need to be balanced against the possible risks, but opportunities abound for engaged and proactive investors.