FHFA Explores Crypto for Mortgages Amid Self-Custody Debate

The Federal Housing Finance Agency’s (FHFA) recent directive to explore the inclusion of cryptocurrency in single-family mortgage risk assessments has sparked significant debate. The directive aims to allow long-term crypto holders to use their digital assets for mortgage qualification without liquidating them, potentially modernizing the housing finance system for the digital age.

However, some interpretations of the directive have suggested that crypto assets must be custodied on a US-regulated exchange to be considered. This misreading could lead to serious consequences, as it would contradict the plain text of the directive. The directive states that digital assets must be capable of being evidenced and stored on a US-regulated, centralized exchange, but this does not imply a ban on assets held elsewhere. The key requirement is verifiability, not a specific custody model.

Self-custody, where individuals manage their own digital assets, is a fundamental aspect of the crypto system. It offers superior transparency, auditability, and protection compared to centralized exchanges. Collapses of major custodians have highlighted the real counterparty risk associated with centralized systems. Self-custodied assets, when properly documented, can be fully auditable and offer a higher level of security through cold storage and non-custodial wallets. They are also verifiable, with third-party tools available to attest to wallet holdings and transaction history.

Excluding self-custodied assets from mortgage underwriting simply because they are not exchange-custodied could incentivize less secure practices and penalize users for adhering to best crypto practices. A more balanced approach would allow both self-custodied and custodial holdings, provided they meet standards of verifiability and liquidity. This framework should also apply appropriate valuation discounts to account for volatility and limit crypto’s share of total reserves using a risk-based tiered approach. Clear documentation of verification and pricing methods, regardless of custody type, is essential.

This directive has the potential to modernize housing finance, but it must avoid forcing crypto to mimic traditional models. The focus should be on smart ways to verify decentralized assets rather than flattening decentralization to fit old risk boxes. This approach is crucial not only for crypto holders but also for the integrity of the mortgage system itself.

The challenge extends beyond mortgage underwriting. From tax reporting to securities classification, many rules assume all users rely on centralized intermediaries. However, millions of participants choose self-custody or decentralized platforms for transparency, autonomy, and security. Both models are legitimate, and any effective regulatory framework must recognize this diversity. Policymakers and regulators need a deeper understanding of decentralized technology, the importance of self-custody, and the tools available to verify ownership without relying on third parties.

Without this foundation, future directives risk overlooking large segments of the crypto ecosystem and failing to account for the full range of industry participants. The FHFA’s directive is a step in the right direction, but it must be implemented with a nuanced understanding of how crypto actually works to avoid exposing homebuyers to greater counterparty risk.