The Breakdown - Crypto Mortgages Are Here

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, June 26th, and today we are talking about crypto and mortgages. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, today we are doing a very grab-baggy sort of episode. We have a bunch of different smaller topics that all add up to a pretty similar theme, kind of one of the dominant

Starting point is 00:00:46 ones of the moment, which is just crypto's continued integration into the mainstream financial system. And we're going to kick it off, actually, with some interesting updates from the director of the Federal Housing Finance Agency, FHFA. Yesterday, Director Bill Pulte tweeted, After significant studying and in keeping with President Trump's vision to make the United States the crypto capital of the world, today I ordered the great Fannie Mae and Freddie Mac to prepare their businesses to count cryptocurrency as an asset for a mortgage. The tweet included the signed order which provided some further details. Crypto held in U.S. regulated centralized exchanges will soon count towards net assets in a similar way to a stock portfolio. Adjustments for market

Starting point is 00:01:23 volatility and concentration risk adjustments will be applied, so it won't mean much if you're all in on meme coins. But for those with significant holdings of Bitcoin and major alts, this will mean they can qualify for a mortgage without necessarily selling. Now, for those who aren't familiar, Fannie Mae and Freddie Mac are largely responsible for packaging and reselling mortgages written by the commercial banks. They touch around 70% of U.S. mortgages at some point in the process, meaning that this change should trickle down into standard loan underwriting procedures as well. Getting specific, this is not about crypto being added to mortgage collateral, but instead about formally recognizing crypto as part of your net worth on loan applications.

Starting point is 00:01:59 Bitcoiners cheered this on as a big step forward, with Michael Saylor tweeting, A truly historic day. The U.S. mortgage industry leads and the global banking system will follow. The logic is that formal recognition of Bitcoin as an asset and mortgage lending can unlock more innovative products in the future. Many are looking towards the idea of taking out a mortgage with a small amount of Bitcoin attached, serving as a form of default insurance, or being used to buy down interest rates on the loan. Immediate analysis centers on what this does as a policy change. Nick Newman of Kasa highlighted that the new policy doesn't recognize self-custody, tweeting, this is a mistake. Self-custody is fundamentally a lot.

Starting point is 00:02:32 line with American values. It's trivial to prove ownership of Bitcoin in self-custody. Finance lawyer Scott Johnson noted that this isn't really very different from other assets, commenting, this is really just a method to verify control over assets. It's a spectrum and third-party verification is simply more reliable for this purpose. It's the same as how they'll verify cash reserves held in a bank account, and will ignore cash you might report to own under your mattress. Maybe it's yours, maybe it's not. Put it into a verified identified account in your name to demonstrate control and that's good enough for us. Once it's counted towards reserves, it's unlikely there's any requirement to keep it there once the mortgage is issued. This could also be used as a policy lever to repatriate funds,

Starting point is 00:03:09 given that only U.S. regulated exchanges can be used to verify holdings. The other big policy lever that people have their eye on is how this changes the buying power for young people with crypto holdings. Trader Tyler Neville wrote, Are you paying attention yet? Home affordability is why people aren't procreating. Just like VC needs the public markets to offload their supply of private companies, boomers need the next generation to be able to bid on their housing as they move into nursing. homes. Ben Hunt, the writer of Epsilon theory, remains skeptical that adding Bitcoin into the financialization of everything is a good idea. He responded to the announcement by tweeting,

Starting point is 00:03:39 we deserve every bit of the bad things that are going to happen. Indeed, there are many doomsayers suggesting that this will lead to a repeat of 2008, but I don't know, it just doesn't seem that significant. All this change seems likely to do in the short term is count Bitcoin holdings in determining net worth in the same way as Nvidia stock. It will likely have a pretty big haircut for volatility, and might not even be large enough to move the needle on a nationwide scale. What it does do is continue to the path of Bitcoin becoming normalized. Bitwise CEO Hunter Horsley wrote, Bitcoin is pristine collateral and can now be counted as an asset when applying for a mortgage.

Starting point is 00:04:10 2025, crypto is becoming mainstream. Today's episode of The Breakdown is brought to you exclusively by Grayscale. Grayscale is almost certainly a name you know. They've been offering exposure to crypto for over a decade now and offer over 20 different crypto investment products ranging from single asset to diversify to thematic exposure to crypto and the broader crypto industry. They have long been innovators at the intersection of TradFi and Crypto, and one of the benefits for a lot of us is that Grayscale products are available right through your existing brokerage or IRA. Now, of course, investing involves risk,

Starting point is 00:04:48 including possible loss of principle. For more information and important disclosures, visitgrayscale.com. Go to Grayscale.com to explore their full suite of crypto investment products. and invest in your share of the future. Next up in our grab bag are comments from SEC Commissioner Hester Perce, who says that in-kind redemptions for crypto ETFs are on the horizon. Speaking at the Bitcoin Policy Institute conference in D.C. yesterday, Perce said that issuers, including BlackRock, had been asking for this change for months. When asked whether the SEC would approve the applications that have been filled this year,

Starting point is 00:05:21 she responded, those are going through the process now. So I think that's something that's certainly on the horizon at some point. I can't prejudge, but we hear that. that there's a lot of interest. This was a controversial choice when the Bitcoin ETFs were approved last January. It meant that instead of sending and receiving Bitcoin directly to the funds, marketmakers dealt in cash that would be used to buy and sell Bitcoin on the back end. It added an extra step of friction for the large institutional investors that could have been

Starting point is 00:05:45 set up to handle Bitcoin directly. It also introduced some settlement risk with market makers less able to lock in a Bitcoin price when dealing with the ETFs. At the time, people speculated that the Gensler SEC didn't want institutional market makers touching crypto directly. We were still in the middle of the agency's crackdown, and it wasn't clear how this activity would be regulated. That was especially true for the banks that participated in marketmaking like J.P. Morgan and Goldman Sachs. The decision flew against the way that most ETFs work. Marketmakers generally buy stocks from the open market, then deposit them with ETF issuers to create new shares. Now, for individual investors, this change won't mean a great deal. When we're close to,

Starting point is 00:06:20 retail traders being able to withdraw Bitcoin from the ETFs into self-custody. Back in January, when these applications were placed, Bloomberg's James Safar commented, mostly what it means is that the ETF should trade even more efficiently than they already do, because theoretically, things can be streamlined. The change will also reduce the tax burden on the products as they won't be constantly selling and rebuying Bitcoin. You could improve tracking errors in liquidity as well. BlackRock's Bitcoin ETF is already one of the most heavily traded products on the market,

Starting point is 00:06:45 so liquidity improvements there are probably quite marginal. But the change could help smaller funds attract more active market makers. And so once again, we have the same theme that you've heard before, and you will continue to hear again throughout this show, a marginal change that most retail traders won't notice, but another big step towards bringing Bitcoin into parity with all other asset classes in the financial markets. Speaking of parity, SoFi is joining the FinTech push into crypto. The full-service online financial platform is adding the ability to trade and hold crypto

Starting point is 00:07:11 including Bitcoin and Eath later this year. They also plan to offer stablecoins and other crypto services. Now, SoFi had pulled their crypto service in 2023 after becoming a regulated bank. Their Wednesday announcement noted that the two interpretive letters issued by the OCC in March and May, that banks are now allowed to offer crypto custody, trading, and stablecoin services. As part of their product overhaul, SOFI plans to introduce international remittances for the first time, which will include support for stablecoins. They said that the addition of stablecoins will allow them to offer

Starting point is 00:07:39 fast remittances available 24-7. And so while this is just the return of services that used to be available, it's still yet another marker in the normalization of crypto under this administration. SoFi is one of the first banks to take advantage of regulatory changes to launch crypto products. They're also the largest digital bank in the U.S. Sofey sets the new bar of the services that online banking customers can expect. SoFi expects to allow customers to borrow against their crypto assets in the future, showing how, once again, crypto is becoming a normal collateral asset. Tucked away in the press release, Sofi also mentioned that they will introduce staking features

Starting point is 00:08:10 to round out their crypto offering. Said Sofi CEO Anthony Noto in a statement, The future of financial services is being completely reinvented through innovations in crypto, digital assets, and blockchain more broadly. We're accelerating our efforts to give members more choice and more control, whether they're investing, sending money across borders or planning for their future. FinTech investor Tanner Manson tweeted, Let's freaking go!

Starting point is 00:08:31 This is SOFi deepening wallet share and replacing the need for apps like Coinvacer Wise. Sticker your users, higher engagement, big moves. Now, a lot of crypto holders got burned when SOFi shut off their crypto service in 2023 and were forced to sell the bottom rather than send their tokens elsewhere. So we will see if they're able to win back crypto customers. Still, when it comes to putting crypto back in front of retail, SOFi adds 11 million customers that fit a very different demographic to the 25 million users, for example, on Robin Hood.

Starting point is 00:08:58 On another theme of the financialization of crypto or the cryptization of finance, or whatever intersection it is, startup investment platform Republic plans to tokenize private company stock, starting with SpaceX. The idea has been floated by many other platforms, most notably Robin Hood, who are in the middle of pitching regulatory changes to the SEC. See, Republic, however, plans to launch their SpaceX token this week, with plans to follow up with OpenAI and Anthropic tokens in the future. They're getting around the regulations by offering

Starting point is 00:09:23 tokens that track their value of these private shares rather than tokenizing actual stock. Now, to sum, this is a massive red flag. Republic is issuing these tokens in the U.S. under a small crowdfunding provision in the 2012 Jobs Act that allows them to raise up to $5 million a year from retail investors. Token holders won't become SpaceX shareholders or have any equity rights to the private company. So these tokens will functionally just be a promise to pay any price appreciation in the stock underwritten by Republic's balance sheet. CEO Kendrick Neuyan said that he's confident in the legality of the tokens. He plans for Republic to hold shares of SpaceX or some other exposure to the company's value in order to back the tokens. Now beyond any particular

Starting point is 00:10:00 legal issues, there also are practical concerns. Large private companies like SpaceX are fairly liquid in the secondary market, but this informal trading is still a far cry from price discovery in the public markets, meaning in other words that we could see wild dislocations fueled by speculators. Republic is minting these tokens on Solana, though they'll be locked for 12 months so they come with additional illiquidity risk. Republic said the tokens will be sold initially based on secondary market prices, but they will only owe any price appreciation when the company is sold or goes public. So unless there's active market making, the tokens could struggle to stay connected to the price of the stock once trading is live. Now, this is a pretty small experiment, limiting all of these

Starting point is 00:10:36 concerns. Republic is only taking a maximum of $5,000 per customer for these tokens, and their legal pathway only allows them to issue $5 million in tokens per year. Still, it highlights that regulatory changes are needed before a product like this can come to market with sturdy consumer protections. Robin Hood are attempting to launch their tokenized private stock fully backed by actual stock holdings. However, under current regulations, they still run into issues with how private companies work. If a startup has more than 2,000 shareholders, then they have public reporting requirements in line with public companies, which is something that most startups avoid. that might make it difficult for any tokenized private stock to come with normal shareholder rights.

Starting point is 00:11:11 Mr. Inc. read the docs and commented, Don't love it, super janky's structure that's likely the result of inflexible regulations. All the hoops republic had to jump through to bring SpaceX on chain if created a bad product for users. It's cool to see experimentation around bringing private market assets on chain, but this structure is not the future. Make sure you know what you're buying before you click the big green button. Ultimately, I think this is an interesting experiment, more intellectual than anything else, but it does show that even though we are making major progress on the integration of tradfi and

Starting point is 00:11:40 crypto, we are not fully there yet. For now, that is going to do it for today's breakdown. Appreciate you listening as always. And until next time, be safe and take care of each other. Peace.

The Breakdown - Crypto Mortgages Are Here

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