FHFA Risks Amplifying Counterparty Vulnerabilities for Homebuyers

Perspective by: Margaret Rosenfeld, chief legal officer of Everstake

The recent guidance from the Federal Housing Finance Agency (FHFA) to investigate how cryptocurrency might be factored into single-family mortgage risk evaluations is a positive and long-awaited advancement.

If enacted, it could enable long-term crypto investors to utilize their digital assets when applying for a mortgage without necessitating their liquidation.

For it to achieve its potential, the ensuing proposals must reflect the operational realities of crypto. This necessitates acknowledging the validity of self-held digital assets.

Misinterpretation of the FHFA directive

Some have already misinterpreted the guidance that stipulates crypto must be held on a US-regulated exchange to be considered viable. That would be a grave error — and contrary to the explicit language of the directive.

“Digital assets… must be capable of being evidenced and stored on a US-regulated, centralized exchange subject to all applicable laws.”

The term “capable of being stored” is unmistakable. The guidance demands assets be validated and securely managed through US-regulated structures, not imposing a restriction on assets held outside of them. Verifiability should be the benchmark, rather than a prescribed custody model.

The security argument for self-holding

Self-holding is not an outlier practice in crypto. It is the cornerstone of the system’s framework and security. In comparison to centralized exchanges, well-maintained self-custody can yield enhanced transparency, auditability, and protection. The failures of significant custodians and centralized exchanges have illustrated the real risks associated with counterparties.

When adequately documented, self-held assets can be thoroughly auditable, as on-chain records confirm balance and ownership. They also provide a superior level of security, since cold storage and non-custodial wallets mitigate single points of failure. Furthermore, self-held assets are verifiable, with third-party tools presently available to affirm wallet holdings and transaction histories.

If regulators eliminate these assets from mortgage assessment solely because they aren’t exchange-custodied, they risk promoting less secure alternatives and penalizing users for managing crypto responsibly.

A framework that fosters innovation

There’s a more favorable route. Any robust crypto mortgage framework ought to permit both self-held and custodial assets, as long as they comply with standards of verifiability and liquidity. It should also apply relevant valuation reductions (haircuts) to factor in volatility.

Another essential criterion is capping crypto’s proportion of total reserves using a standardized risk-based tiered approach.

Related: US regulator instructs Fannie Mae, Freddie Mac to consider crypto for mortgages

Ultimately, it should require straightforward documentation of verification and pricing practices, irrespective of custody style. This approach is already applied to fluctuating assets like stocks, foreign currencies, and even private equity. Crypto should receive no different treatment.

Avoid imposing crypto into outdated frameworks

This guidance holds the potential to transform housing finance for a contemporary era. It must, however, steer clear of the pitfall of compelling crypto to replicate traditional systems merely for comprehensibility.

We don’t need to compress decentralization to adhere to antiquated risk parameters. We merely require intelligent methods to authenticate it. Let’s ensure this is executed correctly, not just for crypto holders but also for the integrity of the mortgage system itself.

This represents only one instance of a broader challenge surrounding new crypto policies. From tax reporting to securities categorization, an excessive number of regulations are drafted on the premise that all users depend on centralized intermediaries. Numerous participants opt for self-custody or decentralized platforms because they prioritize transparency, autonomy, absence of traditional intermediaries, and security. Others favor the regulated custodians that centralization provides.

Both models are valid, and any effective regulatory framework must acknowledge that users will continue to seek diverse options.