On 2nd May 2021, Alaco Analytics penned a guest article for Digital Bytes on the Rise of the Bitcoin Mortgage. A link to the original article can be found here.
The rise of the Bitcoin mortgage
With property purchases on the rise in the UK, expect to hear a lot more about Bitcoin mortgages in the coming months.
Amid a boom in crypto prices, retail investors are capitalising on the surge to deploy their proceeds into real estate. A mature regulatory landscape, the expansion of crypto services, and a willingness by banks to accept Bitcoin are key factors in this new trend.
Over the past 12 months searches of ‘Bitcoin’ against terms associated with property have quadrupled globally. The UK has experienced the largest growth in these search terms, with ‘Bitcoin’ and ‘Property’ increasing together by more than 500 percent between November 2020 and its peak in January 2021. Canada, Ireland, US, Australia, and South Africa have all witnessed similar trends.
That these searches have increased should not be a surprise. With few readily available traditional avenues to deploy or spend proceeds – and with crypto assets disproportionately held by younger generations – thoughts invariably turn to property.
The history of Bitcoin and property is highly erratic. Following some isolated Bitcoin house purchases in 2014, it wasn’t until late 2017 that the first wave of crypto money entered the property market.
In September 2017 Bitcoin was used in a real estate purchase in Texas. This was followed in December 2017 with two properties sold in Bitcoin in the UK. The news accompanied reports that landlords in the UK were increasingly willing to accept Bitcoin as rent, with several announcing such schemes in late 2017.
However, this activity did not culminate in a lasting trend. Sales were largely a reflection of the short-lived spike in the value of Bitcoin, rather than acceptance by financial markets or advances in the regulatory landscape. Concerns over how to appropriately assess the source of funds for financial crime risks remained a sticking point. As such, the market for Bitcoin property purchases remained mute throughout 2018 and 2019 as asset prices fell and lenders remained wary.
The second price explosion – beginning in late 2020 and sustaining through today – has, however, brought a renewed appetite for Bitcoin-backed mortgages, along with huge investment and an array of supporting services. And this one is far more durable.
According to a recent report in The Block, lenders accounting for close to 40% of the UK mortgage market are now willing to accept Bitcoin proceeds for house purchases. Among those named in the report as accepting Bitcoin proceeds are Natwest, Nationwide Building Society and Barclays.
All three banks also confirmed that detailed checks are carried out on the source and credibility of any Bitcoin deposits before acceptance. In the case of Barclays, specific checks are in place to review the origin of funds.
These comments are crucial for two reasons: first, they show that banks increasingly understand crypto-assets and the inherent (or perceived) risks associated with them; and second, that they have taken steps to put in place processes – including engaging third parties – to identify and assess those risks.
Recent press reports refer to similar trends in the wider mortgage market, with conveyancing solicitors and estate agents increasingly comfortable accepting crypto assets as proceeds on house purchases once certain checks have been satisfied.
A second aspect to this has been the convergence of regimes toward a more coherent approach to regulating cryptocurrencies. In the UK, the FCA’s updated 2017 AML / CTF regime for crypto-asset businesses has set the bar for sectoral compliance, coming into force simultaneously with the EU’s Fifth Anti-Money laundering Directive in 2020.
This legislation has been buttressed by similar work in Singapore, Hong Kong, South Korea, and the US, supported by FATF’s supranational efforts to embed and coordinate global compliance guidelines for Virtual Asset Service Providers. The result being closer alignment with compliance procedures in the traditional financial sector.
Out of this effort has sprung an array of services connecting the traditional financial sector with crypto-assets. In March, NASDAQ-listed Mogo Finance Technology announced a new Bitcoin rewards scheme for its mortgage holders. In the same month, BlockFi, a New York-based lending firm, raised $350 million to expand its offering of crypto loans for real estate purchases. BlockFi’s story is classic start up disruption: established in 2017 after its founder was unable to secure a mortgage using crypto proceeds, the company is now valued at $3 billion.
Wider still are the custody businesses, crypto law firms, and blockchain analytics platforms – us included – that provide auxiliary services to the crypto lending sector. In recent months, the number of requests we have processed for audits on Bitcoin proceeds for house purchases has increased markedly. Notable is the diversity of requesters of these services, who include retail and investment banks, solicitors, and crypto lenders.
The crypto industry has made great strides since 2017. But the undoubted benefit of today’s ecosystem is the depth and breadth of services available, making it not just easier to account for and evidence crypto assets, but also to lead the way in new areas of finance.
It is still early days for crypto-backed house purchases, but the potential size of the opportunity is huge. The US mortgage market alone is valued at approximately $11.05 trillion with an estimated $1.91 trillion in new mortgages funded in 2020. There are no current figures on what portion of this sum is represented by digital assets. But expect it to grow sharply as crypto house loans go mainstream.