Author: FinTax

Recently, the Director of the Federal Housing Finance Agency (FHFA) in the United States publicly stated that he has requested Fannie Mae and Freddie Mac (the "GSEs") to assess the possibility of accepting cryptocurrency assets as collateral for mortgage loans.

Linking highly volatile cryptocurrencies like Bitcoin and Ethereum directly to the real estate market, which is crucial to the national economy and people's livelihoods, and doing so through systemically important institutions like the GSEs, goes beyond mere technological innovation. It represents a profound transformation that could reshape the risk landscape and challenge regulatory wisdom. Is this a visionary embrace of the future, or has another Pandora's box been opened?

Market actions have been swift and decisive. Shortly after the FHFA Director announced this move, JPMorgan also announced that it is actively researching loan solutions using cryptocurrencies like Bitcoin and Ethereum as collateral. For its CEO Jamie Dimon, who has sharply criticized Bitcoin in the past, this is undoubtedly a dramatic turnaround, yet it precisely illustrates that even conservative Wall Street giants seem unable to resist the powerful pull of cryptocurrencies integrating into mainstream finance.

2. The GSEs in the Eye of the Storm: Understanding the Cornerstone of This Transformation

To understand the weight of this policy, we must first recognize the irreplaceable "stabilizing force" position of the GSEs in the U.S. financial system. Fannie Mae and Freddie Mac are not traditional commercial banks; they do not directly issue loans to homebuyers. Their business model serves as a massive "transit station" and "liquidity engine" for the U.S. real estate market. Specifically, their operational process involves purchasing, packaging, securitizing, and guaranteeing loans, which are then sold to investors.

Commercial banks can sell the mortgages they issue to homebuyers to the GSEs. The GSEs aggregate these vast amounts of loans into a large asset pool and issue Mortgage-Backed Securities (MBS) based on this pool. At the same time, they provide guarantees for these MBS. These guaranteed MBS are sold to global institutional investors such as pension funds, insurance companies, and sovereign wealth funds.

The essence of this model lies in the fact that the GSEs inject a continuous stream of liquidity into the housing loan market. After banks issue loans, they can quickly recoup their funds, enabling them to issue more loans. This allows Americans to obtain housing loans at lower interest rates and longer terms, serving as an important institutional guarantee for the "American Dream" of homeownership.

However, it is precisely because of this core position that they nearly triggered a collapse of the global financial system during the 2008 subprime mortgage crisis. At that time, a large number of subprime mortgages were packaged into MBS, and as the real estate bubble burst, a wave of defaults ensued, causing the value of the GSE-backed MBS to plummet. Ultimately, the U.S. government had to spend nearly $200 billion to rescue them, placing them under government oversight to this day.

Therefore, any policy changes involving the GSEs are not trivial matters. Their every move directly relates to the stability of the U.S. real estate market, the safety of the financial system, and ultimately—the interests of taxpayers. Allowing an institution that has proven vulnerable in crises and is still "backed" by the government to explore the acceptance of cryptocurrencies, a new and high-risk asset class, sends signals and poses potential risks that deserve our utmost attention.

3. Hitting Three Birds with One Stone: The Multiple Narratives Behind Crypto Collateral

Introducing cryptocurrencies into the collateral category of the GSEs is not a spur-of-the-moment decision by regulators. It reflects the complex game and evolution of attitudes among the cryptocurrency industry, the real estate market, and U.S. overall policy. This is undoubtedly one of the most significant endorsements of "legitimacy" since the birth of cryptocurrencies.

If cryptocurrencies can be used as collateral for federally guaranteed housing loans, it means they are effectively recognized as a store of value that can be financialized, on par with stocks, bonds, and real estate. This far exceeds the significance of the SEC's approval of Bitcoin ETFs: ETFs are merely investment channels, while collateral directly touches the foundation of assets—credit creation.

For a long time, holders of cryptocurrencies (especially early investors and whales) have faced a "happy trouble": they possess substantial unrealized gains in the crypto world, but to use them for large real-world purchases, they must sell and realize those gains, triggering high capital gains taxes. The "collateral" model perfectly solves this problem. Holders do not need to sell their cryptocurrencies; they can use them as collateral to obtain dollar loans for purchasing homes, achieving both asset liquidity and avoiding tax burdens, which could instantly activate a vast potential investment group.

Moreover, to facilitate cryptocurrency collateral, the GSEs and their partnering financial institutions must establish a new, secure, and reliable system for valuation, custody, clearing, and risk management. This will compel traditional finance to deeply integrate with crypto-native technologies, potentially giving rise to a new FinTech sector.

For the U.S. real estate market, which is struggling with high interest rates, this seems like a "shot in the arm." Introducing crypto wealth could bring a new wave of high-net-worth buyers to the market, especially in high-priced areas where tech elites gather, helping to boost transaction volumes and offset the downward pressure from interest rate hikes. This move marks the formal inclusion of tokenized assets into the core business processes of the traditional financial system. It is not just about Bitcoin or Ethereum; it paves the way for broader asset tokenization in the future. Once the model is established, the asset forms and trading efficiencies of the entire financial market could be rewritten.

4. Exploring Two Paths: The Agile GSEs and Cautious JPMorgan

History does not repeat itself simply, but it often rhymes. While we celebrate financial innovation, we must also be wary of the specter of the 2008 subprime crisis. Bundling highly volatile cryptocurrencies with the low liquidity of the real estate market may be akin to playing with fire next to a "powder keg" in the financial system.

Unlike the slow cyclical fluctuations of real estate, cryptocurrencies introduce a new realm of high-frequency, complex risks. Suppose a homebuyer uses Bitcoin worth $100,000 as collateral. If the market suddenly shifts and its price halves in a day, the bank will immediately require additional margin—this is the most apparent risk. However, the uniqueness of Bitcoin goes beyond this: the characteristic that the private key equals ownership means that a single hacking incident, phishing attack, or simple operational error could permanently destroy the collateral; the uncertainty of global regulation hangs like a sword of Damocles, potentially destroying its legitimacy and liquidity at any moment; reliance on custodial platforms introduces counterparty risks akin to those seen with FTX… These risks compound, creating a "minefield" that traditional financial risk control systems struggle to cover.

What is even more concerning is that if a homebuyer cannot promptly meet the margin call, the bank will forcibly liquidate their cryptocurrency assets. When the market declines, thousands of similar collateral positions being liquidated simultaneously could create immense selling pressure, leading to further plummeting prices of cryptocurrencies and triggering more collateral liquidations—this is a classic "death spiral." The speed and scale of such liquidations would far exceed the slow foreclosure processes of 2008, and their destructive power could be exponential.

In contrast to the GSEs, which are directly exploring the retail mortgage market and stepping into high-risk territory, JPMorgan is taking a more cautious approach. JPMorgan is not a newcomer to the crypto market; it has been testing the waters in the crypto payment space for several years. Based on its private blockchain platform Kinexys (formerly Onyx), it provides intraday repurchase and cross-border payment services for institutional clients through Kinexys Digital Payments (formerly JPM Coin). In the area of cryptocurrency collateral, JPMorgan also has some experience; for example, BlackRock has tokenized part of its stock shares through JPMorgan, with these tokens transferred to Barclays Bank as collateral for over-the-counter derivatives trading. Compared to the GSEs, JPMorgan's strategy in the crypto collateral space is to gradually move from low-risk to high-risk scenarios, which may offer greater robustness.

We may not see a repeat of the subprime crisis, but we could very well face a new type of Crypto prime risk. At that point, will the new MBS packaged based on these "crypto mortgage loans" become a new "time bomb" in the global financial system? From a more aggressive and long-term perspective, if the risks of Bitcoin are somewhat traceable, then once more volatile and less liquid altcoins are included as collateral, the risks could be amplified exponentially. How to fairly and timely value these assets, which lack recognized models, will become a challenge for risk control systems.

5. Conclusion

Accepting cryptocurrency mortgage loans is not only a significant step for cryptocurrencies toward mainstream financial markets but also implies a strategic intention for the U.S. to harness this emerging force and consolidate its financial importance. However, directly linking highly volatile cryptocurrencies with the important real estate market, as the GSEs are doing, is akin to a high-risk official financial experiment that will greatly test the wisdom and details of regulation. Meanwhile, what specific plans JPMorgan will adopt is also worth continuous follow-up and observation.

Although "mortgaging Bitcoin to buy a house" has not yet become a reality in the U.S., it remains an excellent experiment for observing how strong financial systems integrate with disruptive technologies in other countries. Regardless, for policymakers worldwide, the lessons of 2008 remain loud and clear: any financial innovation that could shake the foundations of the system must be subjected to strict risk scrutiny, or it may lead to a high cost borne by society as a whole.

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