Why cryptocurrency won’t replace mortgage banking
A reply to Connor Flexman, then a Brown grad doing research with the rationalist community, in the late-2017 cryptocurrency boom. Flexman had argued (the email he was responding to is no longer attached, but his points are answered in order below) that cryptocurrency could displace much of the traditional financial industry, that current US legal precedent wouldn’t shut down ICOs, and that there was a meaningful distinction between “good” and “bad” cryptos worth preserving even if some collapsed. The reply takes mortgage lending as a worked example.
Re: replacing the world’s financial industry, how would that happen? I’ll use mortgages as an example, since a) they’re a major profit center for banks, and b) in many ways they resemble other profit centers, like credit cards, student loans, corporate loans, and so on. The big components of making a profit on mortgages are something like: marketing and brand recognition, so customers use you instead of another lender assessing credit-worthiness, so you know which applicants are likely to pay you back valuing properties, so you know the collateral is sufficient for the amount of the loan servicing the mortgage, ie. getting the borrower to make their payments on time handling the foreclosure and sale process whenever a borrower defaults AFAIK, cryptocurrency doesn’t really help with any of these. Searching ‘cryptocurrency mortgage’, the first hit that comes up is a four-page report by the consulting firm PWC . While it talks glowingly about “blockchain” — presumably, an attempt to sell consulting services to explain how “blockchain” works — it has no numbers, and is very vague. It talks about “more accurate recordkeeping”, for example, but it doesn’t explain how that would actually happen. In California, where I live, mortgages are recorded by the county clerk as a “deed of trust” on the property. This is a public document, and if there’s ever a dispute, anyone can order a certified copy for a small fee. This might be slightly inconvenient, but the cost is a rounding error compared to eg. the default risk on a $600,000 loan. PWC then talks about, eg., how “all loan information relies on the accuracy of underlying source data”, which is true, but cryptocurrency provides no way to compare source data against ground truth. In The Big Short , for example, one of the borrowers took out a mortgage under his dog’s name. There is no way for a blockchain to detect this kind of inaccuracy on the original mortgage application form.
The second hit is a Business Insider article, which is essentially an advertisement for “BrickCoin”, 508.01e.myftpupload.com . A real estate website which is hosted on myftpupload.com, and which misspells “real estate”, doesn’t exactly inspire confidence. The third is a Medium article which says you should buy Bitcoin “because it is growing”, and openly talks about using it to evade taxes. The fourth doesn’t contain the word “mortgage” at all, and is about marijuana for some reason . OK, sure, marijuana companies do have a legitimate reason to use cryptocurrency. But the marijuana industry is tiny, and anyway that’s not what I searched for. The fifth is an article titled “If You Needed a Great Reason to Avoid Bitcoin and Ethereum, This Is It”, but I’ll stop beating this horse now.
Re: legal precedent, AFAICT, following the relevant precedent in the US would create a de facto ICO ban. The obvious precedent is IPOs, and very few if any ICO companies could legally file a US IPO because of the very rigorous disclosure and compliance requirements. How many ICO companies are Sarbanes-Oxley compliant? How many have founders that would be willing to risk twenty years in federal prison for knowingly certifying a non-compliant financial statement?
Re: good cryptos and bad cryptos, during eg. the dot-com bubble, even fully legitimate companies like Yahoo got inflated and then crashed, losing 95% off the peak market cap. Paul Graham explains here: paulgraham.com/bubble.html . Right now, the average Joe isn’t putting their life savings into crypto, but I don’t see any reason why that couldn’t happen in eg. 2020 or so.