What is a Cryptocurrency Mortgage ?
What Is A Blockchain?
In general, a blockchain can be a public or private ledger that has myriad possibilities such as you can trade digital money such as Bitcoin, and with a smart contract can track documents, food, clothing and pinpoint potential hazards such as salmonella in matter of seconds compared to days with the IBM food trust. The ledger records all the transactions in order and prevents people from spending the same money twice. For example, when somebody spends or receives Bitcoins, information about this transaction is stored on the blockchain so that no one can spend them later. The unique thing about a blockchain is that it is decentralized and no single institution owns or controls it.
A smart contract is a computer code stored on the blockchain that automates tasks and transactions, such as property transfers. Smart contracts tend to use Ether on the Ethereum blockchain. So if you want to buy a house, a hash of the contract is executed onto the blockchain and the required amount is paid from the buyer's crypto-wallet. The transaction would be recorded and a smart contract would automatically kick in to complete the deal, such as transferring ownership of the property into the new owners name. Smart contracts are not possible with Bitcoin, but they are an option with other cryptocurrencies like Ether and Ethereum.
More businesses are accepting them and now some mortgage providers have announced plans to introduce a cryptocurrency mortgage-like product that accepts Bitcoin for mortgage payment, such as now UWM accepts Bitcoin as payment. But many people still don't understand how cryptocurrencies work and what the potential benefits of using them for home loans are.
How Will Cryptocurrency Mortgages Work?
There are three ways cryptocurrency mortgages could work. In our opinion, it is not when a lender holds the borrower's crypto-assets and the property is mortgaged as collateral, this is no different than a securities firm holding your stock and providing you margin borrowing. Other words, this is a margin loan, and not truly a crypto mortgage. The first option would be where borrowers pay back their loans with cryptocurrencies directly to the lender instead of paying their monthly payments with fiat currencies. The mortgage lender has the option to either cash out immediately when they receive payment on the spot, or they can hold the crypto as payment. The second option would be for the lender and the borrower to take the risk of highly volatile crypto such as Bitcoin or Dogecoin, or the third option is to create a crypto (possibly mutual fund) with a standard deviation of 1.0 to the 10 year bond market and lend the mortgage in terms of Satoshis, the smallest unit of Bitcoin.
All details of ownership can be securely stored and transferred on the blockchain, so there is no need for a third-party to update documents etc.
Borrowers who have digital money would benefit from the transparency provided by a blockchain based ledger that cannot be altered or hacked, with few exceptions. With a property being collateral, cryptocurrencies would provide a greater level of security and this might be able to help borrowers to get approved for larger mortgages than they might otherwise qualify for as cryptocurrencies are considered property, and could be classified as assets on a 1003.
What Are The Benefits Of A Crypto Mortgage?
They Are Decentralized
The main benefit of blockchain technology is that there is no single point of failure, meaning the blockchain cannot be corrupted or hacked. Originally designed for the cryptocurrency Bitcoin, blockchains are now used in many other areas from banking to health records because they are so secure.
In the same way that they cannot be corrupted, blockchains cannot be altered either. The blockchain prevents any changes to transactions and is much more secure than current financial systems because it doesn't rely on third parties for its security. This is why many financial institutions and governments are looking into integrating blockchain technology to protect against cyber attacks.
Easily Verifiable And Traceable
Because blockchains are decentralized, the records on them cannot be changed or forged. This means they provide a high level of security for financial transactions. The owners of a Bitcoin wallet can verify their balance by checking it against the blockchain and they can also trace every single transaction that has ever been made using that same wallet.
Reduced Costs
The blockchain is also automated and this eliminates the need for third parties. So real estate transactions can be carried out peer to peer and all of the costs associated with using lawyers, brokers, agents and title companies are eliminated. These savings can then be passed on to borrowers in the form of lower rates.
Are There Any Downsides To Cryptocurrency Mortgages?
The prospect of crypto mortgages is an exciting one and it could transform the way that we buy and sell real estate. However, there are potential concerns. As the popularity of crypto grows with new coins being released all of the time, cryptocurrency wallets have become a prime target for hackers.
Crypto-wallets can currently be protected with strong passwords that are difficult to crack and some custodians offer two factor authentication (2FA) where a secondary security key is needed in addition to usernames and passwords. But there is still the potential for crypto to be stolen, which is a serious concern if people rely on it to pay their mortgage. One way that might help mitigate any potential loss is to take the wallet offline, as if it is stored with an external device then it could prove to be difficult to hack it, when hacking typically requires online access. However, if you lose your private key, or storage device, you might just have lost your crypto as well.
Another concern is that unlike fiat currencies such as dollars and euros, cryptocurrencies are not fiat and are not backed by a central bank or government. This means that their value can fluctuate a lot, which may cause issues with payments. Crypto in one country might trade differently in one country vs another as well, as the exchanges might not have interoperability.
If these issues can be managed, the Bitcoin mortgage could be the future of real estate.