Randy Gilbert

Crypto-Backed Mortgages

Randy Gilbert, J.D.

Chief Happiness Officer

Florida’s Title Insurance Company

[email protected]

(954) 500-Title (8485)

CRYPTO-BACKED MORTGAGES

In this article, I interviewed crypto-lender Milo, because it is locally headquartered in Miami, was a featured speaker at the Miami Association of Realtors’ 2022 Global Congress at the Biltmore Hotel in Coral Gables last month, closed over $100 million in loans including those for foreign nationals residing in over 90 countries around the world; thereby bringing more buyers to Florida.1

Crypto basic terms?

  • Fiat. “Real currency” such as coin and paper money of the United States or a foreign county issued by a government’s central bank.
  • Cryptocurrency. The IRS uses the term “virtual currency” which is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange. Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency. It is called cryptocurrency because cryptography is used to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.
  • Wallet. A crypto wallet is a place where you can securely buy, sell, transfer, and keep your crypto. To set up a wallet, (1) Choose a platform you trust (e.g. Coinbase; I use MetaMask, but that only works with Ethereum based tokens); (2) Download the app; (3) Fill out the questions and associate your personal [NOT BUSINESS ACCOUNT– it will not work] banking account with the Wallet; (4) Start buying, selling, or exchanging crypto; and (5) Be sure to write down your private security key, because if you lose or forget it you won’t be able to access your crypto.
  • Transaction Fee, Exchange Fee, Network Fee, Wallet Fee, or “Gas.” Fee incurred when buying crypto, selling crypto, or sending crypto from one wallet to another. Ethereum uses the term Gas.

What is a Crypto-Loan or Crypto-Backed Mortgage? A crypto-loan is a type of secured loan in which a borrower pledges two (2) types of their personal collateral in exchange for obtaining a cash loan from a crypto-lender. It’s a great way for a borrower to obtain a loan, without actually having to sell (i.e. liquidate) their crypto; the advantages of which will be discussed in more detail infra.

The two (2) types of collateral which the crypto-borrower needs to pledge to the crypto-lender are: (1) The borrower’s cryptocurrency (usually equal to at least 100% of the dollar amount of the loan); plus (2) Allow the crypto-lender to also place a mortgage on the real estate which the borrower seeks to either acquire or refinance (usually equal to 65-70% of the cash loan amount). Furthermore, in exchange for obtaining cash from a crypto-lender, the crypto-borrower must also pay back that loan in monthly installments to the crypto-lender. The loans are typically interest only loans, and at this time run between 9.00%-10.00%. As long as the borrower timely makes its monthly interest payments and repays the loan amount in full to the crypto-lender, then the borrower will be entitled to have all of the borrower’s crypto returned at the end of the loan term.

How much do I pay, and how do I pay each month, on my Crypto-Backed Mortgage? By way of example, in exchange for a crypto-borrower receiving a $1,000,000 loan, the crypto-lender would receive from the crypto-borrower: (1) a 2.00% Origination Fee which would equal $20,000 in this hypothetical; (2) An interest only promissory note at 9.00%-10.00% per annum, which the crypto-borrower must make monthly cash payments to the crypto-lender; (3) $1,000,000 of borrower’s crypto transferred into the crypto-lender’s “custodial account” as security for repayment of the loan; plus (4) A mortgage placed on borrower’s real estate at 65-70% of the loan amount meaning the recorded mortgage would be in the amount of either $650-700,000.2

So as you can see, the crypto-lender becomes oversecured to the tune of 165-170% (i.e. 100% of the loan amount (by holding the borrower’s crypto) plus 65-70% (by placing a mortgage on borrower’s property).

Step-by Step process to getting a Crypto-Backed Mortgage? Milo has an online process to apply for a crypto-loan from anywhere in the world.

Speed to Close Loan? 2-4 weeks; with the biggest hold up being obtaining the appraisal.

Interest Rates for Crypto-Backed Mortgage? As of the time of this article interest rates are around 9.00%-10.00% based on a 30 year fixed.

Origination Fee for Crypto-Backed Mortgage? As of the time of this article, origination fees are 2.00% of the loan amount.

Dollar Limitation for Obtaining a Crypto-Backed Mortgage? Up to $5,000,000 with the opportunity to loan more subject to prior approval says Milo.

What Type of Cryptocurrency is Accepted? Milo accepts Bitcoin, Ethereum, and USDC Stablecoins.

Property Use Limitations (i.e. Residential, Commercial, Agricultural, Construction, Vacant Land)? According to Milo, loans are predominantly for properties zoned residential. Commercial loans are not customarily done but may be a potential in the future. Agricultural, vacant land, and construction loans have not been done, but Milo is willing to entertain the possibility.

Are Cash-Out Refinances available? Yes. Same concept as a purchase. Let’s assume a crypto-borrower wants to borrow $1,000,000 in cash (i.e. instead of the money going to a seller the cash is going to the borrower). Once again, in exchange for a crypto-borrower receiving $1,000,000 in cash: (1) The Crypto-Borrower would pay off the existing mortgage on the property so there is no longer any third party mortgages on the property; THEN, the crypto-lender would receive from the crypto-borrower: (2) a 2.00% Origination Fee which would equal $20,000 in this hypothetical; (3) An interest only promissory note at 9.00%-10.00% per annum, which the crypto-borrower must make monthly cash payments to the crypto-lender; (4) $1,000,000 of borrower’s crypto transferred into the crypto-lender’s “custodial account” as security for repayment of the loan; plus (5) A mortgage placed on borrower’s real estate at 65-70% of the loan amount meaning the recorded mortgage would be in the amount of either $650-700,000.

Limitations on getting Title Insurance? None. Because ultimately the seller is taking cash from the crypto-lender for the transaction. So as far as the seller knows, the transaction is just a normal transaction where some lender is paying the Seller off in cash.

Why is the Crypto-Lender so Oversecured? Crypto is considered volatile — with the potential for significant upward and downward movements over shorter time periods. Generally, the more volatile an asset, the riskier it is considered to be as an investment; and thusly, the more potential it also has to offer either higher returns or higher losses. Accordingly, what starts out as the crypto-lender being oversecured by holding assets valued at more than the loan amount (i.e. crypto + mortgage valued at 165-170% of the loan amount), will most assuredly quickly change.

What if my Crypto goes UP in value? If the borrower’s crypto (which is being held as security by the crypto-lender) appreciates by at least 25.00%, only then will the crypto-borrower be entitled to have up to 25.00% of the crypto-borrower’s crypto back; but not before such time.

What if my Crypto goes DOWN in Value (margin-call, foreclosure)? Milo’s strike point is when the crypto depreciates by 65.00%. If the crypto collateral being held in Milo’s custodial account goes down in value by 65.00%, then Milo will require the crypto-borrower post additional crypto or pay down the loan balance.

Keeping with a similar example as above, assuming Milo gave a $1,000,000 cash loan, then the crypto-borrower would receive a margin call if the $1 Million dollars worth of crypto goes down by 65% (i.e -$650,000), then Milo would require the crypto-borrower post additional crypto or pay down the loan balance. To date, Milo claims to have never made a margin call.

Qualifications for an Individual to obtain a Crypto-Backed Mortgage? Many crypto-lenders follow a best practices approach and conduct the same type of AML (“Anti-Money-Laundering”) due diligence that regulated financial institutions conduct. Accordingly, Both the individual crypto-borrowers and then the crypto funds (addressed in the following section) are both scrutinized.

As to the individual crypto-borrower, the crypto-lender will conduct a KYC (“Know Your Customer”) which is akin to a background check. During a KYC, personal information is collected such as: (1) The customer’s full name, place, date of birth, and address; (2) the information is compared to their official government-issued identification, such as a passport or state-issued driver’s license, and proof of residence, such as a utility bill; and (3) The customer’s identity is compared against official databases such as Politically Exposed Persons (PEP) and OFAC’s (Office of Foreign Asset Control) sanction list.

Sourcing of Income to Qualify for a Crypto-Backed Mortgage? As to the crypto funds which the borrower plans to pledge as collateral, reputable crypto-lenders conduct a KYT, which means “Know Your Transaction,” on the funds. KYT refers to the process of examining financial transactions for financial crimes, money laundering, terrorism financing, or other fraudulent or suspicious activities.

* Who holds the Buyer’s Cryptocurrency once the Buyer obtains a Crypto-Backed Mortgage? Milo says that the borrower’s crypto is held in Milo’s segregated “custodial account” which is parked at Coinbase.

* Where is the Buyer’s Cryptocurrency held once the Buyer obtain a Crypto-Backed Mortgage? Milo says that the borrower’s crypto funds are held in their segregated “custodial account” which is located at Coinbase. Coinbase is a secure online platform for buying, selling, transferring, and storing cryptocurrency. However, in the eyes of a crypto-borrower, this is where risk may lie. First, the account is operated and controlled by the crypto-lender. Second, if a transfer were to happen within the custodial account holding borrower’s crypto, the borrower would never know, because the crypto-borrower does not receive alerts or status reports. Rather, the borrower’s crypto currency is placed in the crypto-lender’s “custodial account” using blind faith, that it will never be prematurely accessed or used by the crypto-lender. Third, if the value of cryptocurrency starts to drop violently, as it is prone to do, there is nothing the crypto buyer can do about it, since the crypto-borrower is not allowed to access the custodial account containing borrower’s crypto.

Risks of Crypto loans? (1) Crypto is volatile and if it goes down then the borrower cannot sell to stop-the-bleeding; (2) If the crypto goes down in value (under Milo’s terms by 65%) then the crypto lender may require the crypto-borrower to post additional security; (3) As part of a crypto-loan, crypto-lenders require their borrower to allow the crypto-lender hold the crypto-borrower’s cryptocurrency. Cybercrimes, cyber-hacking, embezzlements, and lender bankruptcies are all high risks. So if a borrower fully pays off their loan, the borrower is now going to want the crypto-lender to release and return the borrower’s crypto. But, if the lender loses a borrower’s cryptocurrency due to a security breach or due to the crypto-lender going bankrupt or insolvent, there is no guarantee that the borrower will ever see their crypto again. A good question to ask may be whether a crypto-lender has insurance against embezzlements, cybercrimes, and hacking; a subject which is discussed in more detail infra?

Is any part of my Cryptocurrency (which is being held by my Crypto-Lender during the life of my loan) FDIC insured? No. The FDIC has put out a statement that crypto assets are not FDIC insured. The FDIC only protects money which depositors place in insured banks in the unlikely event of an insured-banks failure. In such event, deposits are insured in the amount of at least $250,000.

In contrast however, a borrower’s crypto being held by a crypto-lender is not FDIC insured. This means that the crypto-lender may be unable to return the borrowers’ collateral and assets if there is a market crash or if the company experiences a large number of defaults on loans or bankruptcy.

How does the Buyer know their cryptocurrency is safe with the Crypto-Lender, and what options does a Crypto-Borrower have? “Is the fox watching the henhouse?” My biggest question is, whether a crypto-borrower’s crypto is really truly safe once they pledge it to the crypto-lender?

According to Milo, during the life of the loan, the crypto-borrower’s crypto is kept in a separately designated “custodial account” at Coinbase for each crypto-borrower. In other words, the crypto-borrower’s crypto is not commingled with any other crypto-borrower’s crypto. However, although the account which holds the crypto-borrower’s crypto is parked at Coinbase, Coinbase does not act as an independent neutral party or decision maker on what to do with the crypto. Rather, the “custodial account” holding all of the crypto-borrower’s crypto is completely under the control of Milo.

When asked what assurances Milo provides the crypto-borrowers that their “custodial account” won’t be hacked or even raided by insiders, Milo says that it: has audits and licensure requirements by and from the NMLS, Oversight by the OCC, Reports to FinCen; has internal practices and controls; and has a Crime bond, E&O Insurance, and cyber insurance underwritten by Loyds of London which exceeds the amount of the loans it funds. When asked, “For transparency reasons is Milo willing to share those insurance policies to their crypto-borrowers?” Milo answered no. Hopefully, that policy changes in the future.

According to one insurance expert, since a crypto-borrower is really just relying upon the goodwill and name of the crypto-lender in the industry and nothing else, a savvy crypto-borrower would want to request the crypto-lender provide: (1) a Crime or Fidelity Bond – provides loss coverage for crimes like employee dishonesty, theft, forgery, alteration, robbery, burglary, counterfeit, computer and funds transfer fraud, and for property losses in the care, custody or control of the insured; (2) E&O Insurance provides coverage for Errors and omissions relating to claims of: Negligence, Errors in services given, Omissions, Misrepresentations, Violation of good faith and fair dealing, and Inaccurate advice; (3) D&O Insurance – provides coverage for those serving as Directors & Officers (D&O) of a company against claims relating to actual or alleged wrongful acts in managing a company such as: Breach of fiduciary duty resulting in financial losses or bankruptcy, Misrepresentation of company assets, Misuse of company funds, Fraud, Failure to comply with workplace laws, and Lack of corporate governance — Illegal acts or illegal profits are generally not covered under D&O insurance; and (4) Add the crypto-borrower as an Additional Insured – which changes the claimants status to being able to file a claim directly with the crypto-lender’s insurance company.

Why do all this? Why not just sell my crypto, convert it to cash, and then buy the Property? As explained in more detail in the next section, selling crypto for a gain or profit will result in a taxable event. By obtaining a crypto-backed mortgage the crypto-borrower gets to: (1) Use OPP – Other People’s Money; (2) Not sell their crypto; (3) Retain ownership of their Crypto; (4) Avoid paying federal capital gains taxes, because they have not sold their crypto; and (5) Maintain their position and watch their crypto appreciate, if they believe it will increase in value.

Why not just transfer the Crypto Peer-to Peer (i.e. “P2P” meaning directly to the Seller in exchange for Seller’s Property)? If you are the buyer then the reasons are the same as those stated in the preceding paragraph, but there is an added disadvantage for the buyer. No title insurance company will insure the transaction unless the property is purchased with Fiat. In cryptocurrency terms, “Real currency” is called “Fiat” which is coin and paper money of the United States (or other foreign country) issued by that government’s central bank.

How is Crypto treated for federal tax purposes by the IRS? According to IRS Publication 544, virtual currency is treated the same as property for federal income tax purposes, so the same general tax principles that apply to property transactions apply to transactions using virtual currency. Examples of transactions involving virtual currency include:

  1. Exchanging virtual currency for property, goods, or services;
  2. Receiving virtual currency as payment for goods or services;
  3. Receiving or transferring virtual currency for free (without providing any consideration) that does not qualify as a bona fide gift;
  4. Exchanging/trading of one virtual currency for a different virtual currency;
  5. Selling virtual currency; and
  6. Any other disposition of a financial interest in virtual currency.

What are the Tax consequences of obtaining a Crypto loan or Crypto-backed mortgage? Unlike selling crypto to purchase property, pledging crypto to obtain a crypto-backed loan, only to have the crypto-borrower’s crypto returned later is not a taxable event. It’s like the crypto buyer saying, “hold my crypto but give it back to me later, when I pay off your loan.”

Contrarily, What are the Tax Consequences of Buying and Selling Real Estate with Crypto? The IRS published its: Guidance [IRS Notice 2014-21], Publication 544 (Sales and other Disposition of Assets), and FAQs [fully answering 46 different questions] regarding the federal income tax treatment of cryptocurrency (which the IRS calls Virtual Currency) when buying, selling, and exchanging cryptocurrency for property, goods, or services.

IRS FAQ #Q4 is directly on point in asking and answering, “Will I recognize a gain or loss when I sell my virtual currency for real currency? Yes. When you sell virtual currency, you must recognize any capital gain or loss on the sale, subject to any limitations on the deductibility of capital losses. For more information on capital assets, capital gains, and capital losses, see Publication 544, Sales and Other Dispositions of Assets.”

IRS FAQ #Q19. “Will I recognize a gain or loss if I sell or exchange property (other than U.S. dollars) for virtual currency? Yes. If you transfer property held as a capital asset in exchange for virtual currency, you will recognize a capital gain or loss. If you transfer property that is not a capital asset in exchange for virtual currency, you will recognize an ordinary gain or loss. For more information on gains and losses, see Publication 544,, Sales and Other Dispositions of Assets.”

IRS FAQ #Q27. “I received cryptocurrency in a peer-to-peer transaction or some other type of transaction that did not involve a cryptocurrency exchange. How do I determine the cryptocurrency’s fair market value at the time of receipt? If you receive cryptocurrency in a peer-to-peer transaction or some other transaction not facilitated by a cryptocurrency exchange, the fair market value of the cryptocurrency is determined as of the date and time the transaction is recorded on the distributed ledger, or would have been recorded on the ledger if it had been an on-chain transaction. The IRS will accept as evidence of fair market value the value as determined by a cryptocurrency or blockchain explorer that analyzes worldwide indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact date and time. If you do not use an explorer value, you must establish that the value you used is an accurate representation of the cryptocurrency’s fair market value.”

IRS FAQ #Q20. “How do I calculate my gain or loss when I exchange property for virtual currency? Your gain or loss is the difference between the fair market value of the virtual currency when received (in general, when the transaction is recorded on the distributed ledger) and your adjusted basis in the property exchanged. For more information on gain or loss from sales or exchanges, see Publication 544, Sales and Other Dispositions of Assets.”

IRS FAQ #Q21. “How do I determine my basis in virtual currency that I have received in exchange for property? If, as part of an arm’s length transaction, you transferred property to someone and received virtual currency in exchange, your basis in that virtual currency is the fair market value of the virtual currency, in U.S. dollars, when the virtual currency is received. For more information on basis, see Publication 551, Basis of Assets.”

IRS FAQ #Q43. “Where do I report my capital gain or loss from virtual currency? You must report most sales and other capital transactions and calculate capital gain or loss in accordance with IRS forms and instructions, including on Form 8949, Sales and Other Dispositions of Capital Assets, and then summarize capital gains and deductible capital losses on Form 1040, Schedule D, Capital Gains and Losses.”

IRS FAQ #Q44. “Where do I report my ordinary income from virtual currency? You must report ordinary income from virtual currency on Form 1040, U.S. Individual Tax Return, Form 1040, U.S. Individual Tax Return,?Form 1040-SS,?Form 1040-NR, or?Form 1040, Schedule 1, Additional Income and Adjustments to Income, as applicable.”

Where else can I get a Crypto-Backed Mortgage? Milo, Figure, Ledn, and USDC.homes.

DISCLAIMER:? Topics discussed are general concepts, not intended to constitute legal advice, accuracy, nor completeness, and may not be relied upon as such; consult an attorney or accountant. The author Randy Gilbert, J.D. is neither an attorney nor an accountant. ?FTIC is a national award winning title insurance company known for its white glove customer service and “No Junk Fee Guarantee.”

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