Moving on from the sea of conventional loans, allow me to introduce to you the new reality of mortgages – crypto-backed mortgages. This attractive innovation permits the use of cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) as collateral, giving them the strength to secure conventional loans. It is important to note that the loan currency value plays a significant role in the loan amount, and this afore-mentioned value is used as security till the pay off the loan.
Interestingly, these dealings employ blockchain technology and smart contracts. This means transactions are not only safe but also transparent. The platform Salt Lending was the pioneer in this area, introduced in 2018. This avant-garde concept is not by any means free from its challenges. It has faced legal and regulatory issues and has had to amend its services.
Crypto-backed mortgages come in three common types: purchase mortgages, cash-out refinancing, and bridge loans. The cryptocurrency used as collateral is assessed for its suitability, and on agreement of terms, the borrower deposits it into the lender’s escrow account. This is held as long as the loan exists. The payments are typically made in fiat currency, and loan completion indicates that the borrower retrieves their collateral. Though, it is important to note that market volatility can lead to a margin call, requiring additional collateral.
Digital assets backed mortgages have benefits which include avoiding taxes and enabling traditional investments. This has even created financing opportunities for those normally without access to traditional banking institutions. On the flip side, the risk concentration is in the volatility of cryptocurrencies. A significant swing in the value of the collateral can lead to margin calls, hence forcing borrowers to grow their collateral or risk liquidation.
Security breaches could also jeopardize the security of the digital assets used as collateral. Any potential borrower must do their due diligence in understanding the terms and conditions. They must understand that enforcement can vary between jurisdictions due to legal and regulatory uncertainties. We know that the birth of any financial product fuelled by cryptocurrency is new and it’s slowly developing its own jurisprudence.
Hence, while crypto-backed mortgages introduce a refreshing opportunity to integrate traditional financial systems with digital assets, it comes with its set of complexities and potential challenges. Any interested borrower, therefore, must weigh the pros and cons before delving into this futuristic financial arena. Careful examination of the risk-reward ratio would be beneficial in determining whether obtaining a crypto-backed mortgage is the most suitable based on one’s present situation. Always remember, knowledge is power, especially in the world of finance.
Source: Cointelegraph
