Viewpoint by: Margaret Rosenfeld, Legal Head at Everstake
The recent announcement from the Federal Housing Finance Agency (FHFA) regarding the potential inclusion of cryptocurrency in evaluating mortgage risk for single-family homes is a positive and much-needed development.
If successfully implemented, this could enable individuals who hold crypto assets long-term to leverage them when applying for a mortgage, without the requirement of selling off their digital holdings.
To fully unlock its potential, any resulting proposals must accurately reflect the nature of cryptocurrency operations. This necessitates acknowledging the validity of individually managed, or self-custodied, digital assets.
A Misinterpretation of the FHFA Guidance
Some parties have prematurely misinterpreted the guidance, suggesting that crypto assets must be held on a US-regulated exchange to be considered. This would be a significant error and goes against the clear wording of the FHFA’s instructions.
The guidance states that “Digital assets… must be capable of being evidenced and stored on a US-regulated, centralized exchange subject to all applicable laws.”
The key phrase here is “capable of being stored.” The directive is asking for assets to be verifiable and securely handled through US-regulated systems, not demanding a complete ban on assets held outside of those systems. The focus should be on verifiability, not on a specific custody arrangement.
The Case for Self-Custody and Security
Self-custody isn’t an unusual practice within the crypto space. It forms a core pillar of the system’s overall architecture and security. When properly managed, self-custody can offer enhanced transparency, easier auditing, and improved protection compared to centralized exchanges. Recent collapses within major custodial services and centralized exchanges have highlighted the tangible risks associated with relying on counterparties.
With proper documentation, self-custodied assets can be thoroughly audited, with on-chain records proving ownership and balance. They also offer an enhanced level of security, as cold storage and non-custodial wallets reduce the potential for single points of failure. Furthermore, self-custodied assets are verifiable, with various third-party tools already available to confirm wallet holdings and transaction history.
If policymakers were to exclude these assets from mortgage assessments solely because they aren’t held on exchanges, they would risk incentivizing less secure practices and unfairly penalizing users for engaging with crypto in a secure manner.
A Framework Promoting Innovation
There’s a more sensible approach. Any reliable crypto mortgage framework should accommodate both self-custodied and exchange-held assets, as long as they meet established standards for verifiability and liquidity. Valuation discounts (haircuts) should also be applied to accurately reflect volatility.
A further key requirement is placing limits on the proportion of total reserves that can be held in cryptocurrency, using a standard tiered approach based on risk.
Related reading: US regulator directs Fannie Mae, Freddie Mac to assess crypto for mortgage eligibility
Crucially, there should be a clear mandate for documenting verification and pricing methodologies, regardless of custody type. This concept is already in use for managing volatile assets like stocks, foreign currencies, and even private equity. Cryptocurrency should be treated consistently.
Avoid Forcing Crypto Into Outdated Models
This guidance presents an opportunity to modernize housing finance for the digital age. However, it’s vital to avoid the mistake of trying to force crypto to conform to traditional models simply for the sake of familiarity.
There’s no need to undermine decentralization to fit pre-existing risk evaluation paradigms. Instead, we need intelligent methods to verify it. It’s crucial to get this right, not only for crypto holders but also for the overall stability of the mortgage system.
This example represents a broader challenge for new crypto policy. From tax reporting to the classification of securities, too many regulations are based on the assumption that all users rely on centralized entities. Millions choose self-custody or decentralized platforms to benefit from transparency, autonomy, and the absence of traditional intermediaries, along with security benefits. Others may prefer the protections of centralized, regulated custodians.
Both approaches are legitimate, and any effective regulatory structure must acknowledge that users will continue to seek diverse options.
Increased technical knowledge regarding decentralized technology is paramount to bridging this divide. Policymakers and regulators require a deeper understanding of the functionality of decentralization, the importance of self-custody, and the tools available for verifying ownership without relying on third-party intermediaries.
Without this foundational knowledge, future directives, statements, regulations, and legislation risk repeating the same errors, overlooking large segments of the ecosystem and failing to account for the full spectrum of crypto industry participants.
Viewpoint by: Margaret Rosenfeld, Legal Head at Everstake.
This article is provided for informational purposes only and is not intended as, nor should it be construed as, legal or investment advice. The opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.