July/Aug. 2021 Issue

Title: Blending Traditional Currencies With Cryptocurrencies

Cryptocurrencies continue to gain the backing and acceptance of large corporations and public interest. Starting with companies like MicroStrategy, then Square, and then Tesla coming in to officially tip the scales, the doors are now open for adoption, even by international governments like El Salvador.

As a store of value, Bitcoin (BTC) is the universal Cryptocurrency for everyone. Beyond that, there are derived coins built for specific purposes. Whoever successfully builds a derived coin for all the essential pillars of society will be ahead of the curve. These specialized coins will be “ready” when the entire ecosystem decides it is ready to accept their usage.

Blending  traditional financing and cryptocurrencies is inevitable. NYDIG’s Greg Cipolaro says the declining volatility from the last three months makes Bitcoin more appealing to institutions. Ripple (XRP) was one of the first cryptocurrencies to get contracts with traditional banks. All eyes are on their current lawsuit with the SEC, as it will have a direct impact on the evolving industry.  

There’s going to be an intersection of traditional currencies and crypto in mortgage lending. Initially, contracts will be complicated to navigate, which is why educational programs need to be implemented as quickly as possible to train mortgage personnel on the intricacies and value of cryptocurrencies in lending. Eventually, smart contracts on the blockchain will reduce the turn time of mortgages and completely change the way we maintain contracts and deeds. There is an opportunity for a significantly higher level of automation and efficiency to be achieved.

Home Buying with Bitcoin 

With Coinbase’s IPO leading the way, crypto companies are warming up to the idea of people using their crypto to buy a home; partially or completely. This opens many possibilities, along with new security and legal concerns.

If a buyer knows the value of cryptocurrencies, has bought into the concept and understands the benefits and risks, they might prefer crypto over cash. The speed and ease of the transfer, coupled with the belief that it is an asset that will further appreciate, would eliminate the need to reinvest the cash acquired by sale, as it is already invested in the believed instrument. There are quite a few ways to buy a home with Bitcoin in the U.S. today. 

The first method is all Bitcoin and no home loan. If there is no loan involved and the seller is accepting Bitcoin as a payment, it is as simple as transferring Bitcoin from the buyer’s Bitcoin wallet to the seller’s bitcoin wallet. This will, however, require a “non-traditional” contract with the seller, in that most real estate professionals are not yet familiar with the nuances of bitcoin-based transactions. Once Bitcoin leaves your wallet, you can only confirm that it has reached a particular Bitcoin address. Unless the seller provides their address before the transaction, verifying that the payment has reached the correct recipient is unreliable. For this reason alone, it is safer to send crypto to people you know and trust.

This works best when the seller has no loan on their property. Otherwise, the bank that has the loan may not accept Bitcoin as payment on the lien, only traditional currencies. This is because the seller might have to sell the Bitcoins, incur capital gains tax, and then pay the bank with the post-tax money. The onus will be on the seller to accept a contract at the price of BTC on the day that it is executed. If BTC’s value were to decrease significantly overnight, the seller must be willing to hold the acquired BTC for a while to regain profit margins.

Underwriting and servicing on the blockchain

Blockchain is a decentralized method of recording transactions using cryptocurrencies. It is not maintained by any centralized authority, but crowd-sourced by verified participants who can validate transactions. Once on the blockchain, transactions are immortal and immutable.

In most cases, the blockchain is a public ledger of all transactions. Various other transactions associated with verification of income, title and funding of a loan could then trigger the qualification, underwriting and even the complete sale of a home. Eventually, the transaction and contract of sale could be visible on this ledger, as well as with tracking of loan payments for servicing.

A few companies have made efforts to move in this direction, starting with a proof of concept for Ethereum-based blockchains and smart contracts for mortgage lending. Unfortunately, this is still an emerging field. But once this gains traction, the closing and underwriting times and associated other costs could be reduced significantly – ultimately making purchasing a home less expensive.

The BIG question facing everyone is – How many people do you think will trade in Bitcoin? With Bitcoin and other cryptocurrencies being emergent technologies, there are many considerations to explore, especially when it comes to laws and regulations. Those aside, mortgage providers and other forms of lending institutions need to take efforts to improve the affordability of home buying if there is any hope of people regularly using crypto to buy or sell within the real estate industry. Only time will tell, and it is probably not in the far too distant future.