FHFA Explores Crypto for Mortgages Amidst Debate on Self-Custody

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, the implementation of this directive could expose homebuyers to greater counterparty risk if not handled correctly.

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 a serious mistake, as the directive explicitly states that digital assets must be "capable of being evidenced and stored on a US-regulated, centralized exchange subject to all applicable laws." The phrase "capable of being stored" indicates that the focus should be on verifiability and safe handling through US-regulated infrastructure, not on banning assets held elsewhere.

Self-custody, where individuals manage their own digital assets, is a fundamental aspect of the crypto system's architecture and security. Well-managed self-custody can offer superior transparency, auditability, and protection compared to centralized exchanges. Collapses of major custodians and centralized exchanges have highlighted the real counterparty risks involved. Properly documented, self-custodied assets can be fully auditable, with onchain records demonstrating balance and ownership. They also offer a higher level of security, as cold storage and non-custodial wallets reduce single points of failure. Additionally, self-custodied assets are verifiable, with third-party tools available to attest to wallet holdings and transaction history.

If policymakers exclude these assets from mortgage underwriting simply because they aren’t exchange-custodied, they risk incentivizing less secure practices and penalizing users for doing crypto correctly. A sound crypto mortgage framework should allow both self-custodied and custodial holdings, provided they meet standards of verifiability and liquidity. It should also apply appropriate valuation discounts to account for volatility and limit crypto’s share of total reserves using a standard risk-based tiered approach. Clear documentation of verification and pricing methods, regardless of custody type, is also essential.

This directive has the potential to modernize housing finance for a digital age, but it must avoid the trap of forcing crypto to mimic traditional models just to be understood. We don’t need to flatten decentralization to fit old risk boxes; we just need smart ways to verify it. This thinking is already applied to volatile assets like stocks, foreign currencies, and even private shares. Crypto should be treated no differently.

This is only one example of a larger challenge facing new crypto policy. From tax reporting to securities classification, too many rules are drafted assuming all users rely on centralized intermediaries. Millions of participants choose self-custody or decentralized platforms because they value transparency, autonomy, lack of traditional intermediaries, and security. Others prefer regulated custodians that centralization offers. Both models are legitimate, and any effective regulatory framework must recognize that users will continue to demand different options.

More technical education about decentralized technology is essential to bridge this gap. Policymakers and regulators need a deeper understanding of how decentralization works, why self-custody matters, and what tools exist to verify ownership without relying on third parties. Without this foundation, future directives, statements, regulations, and legislation risk repeating the same mistake, which overlooks large segments of the ecosystem and fails to account for the full range of crypto industry participants.