The Bitcoin world has a logistical problem: many of its true believers are theoretically wealthy, but buying a house with their crypto is a drag, along with a pesky tax bill and fear of running out of future wealth. A company-backed fintech startup thinks it’s solved both problems.
Miami-based company Milo offers what it describes as the “world’s first crypto mortgage,” which it claims will allow clients to leverage their wealth to buy a US home without a down payment or the need to convert their Bitcoin to dollars. – and with the ability to get all their Bitcoins back once the loan is paid off, no FOMO is needed.
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The Approved Direct Lender does not plan to require a down payment, social security number, FICO score, or even customer tax returns. “Your crypto is what qualifies you,” the company states on its website. Specifically, potential customers must hold at least $150,000 worth of Bitcoin and enough to cover the entire loan initially. “For example, if your loan value is $250,000, then you would need to have the same equivalent value in Bitcoin,” the company says. If customers pledge even more Bitcoin, they receive a lower interest rate, as this reduces Milo’s risk.
Although only available to those with enough bitcoin to get started, Milo hopes to expand by accepting many more cryptocurrencies in the future. “We really want to bring this to as many people with digital wealth as possible. [as possible]Josip Rupena, CEO and founder of Milo, told Motherboard. (Although, he added, “a lot of that relies on the legal clarity of some of these other cryptocurrencies.”)
Essentially, Milo is opening up a system for crypto enthusiasts that has long been available to the traditional wealthy.
If a client is approved after completing a 10-minute application that involves entering their crypto wealth and identifying documents, like passport or driver’s license, they pay an origination fee and transfer the necessary Bitcoin to a “trusted third-party custodian”, where it is “locked for the duration of the loan”. Milo buys the house for the client, who then begins paying off a 30-year mortgage with interest, using cryptocurrencies or fiat currencies. When the mortgage is fully paid off, the Bitcoin is returned to the customer’s wallet.
Essentially, Milo is opening up a system for crypto enthusiasts that has long been available to the more traditional wealthy. For years, and with increasing frequency lately, wealthy Americans have borrowed against their stock portfolios to buy big assets, skirting a tax bill and keeping their shares – a solid two-for-one deal. “You could buy a boat, you could go to Disney World, you could buy a business,” a financial advisor recently told the the wall street journal. “The tax benefits are mind-boggling.”
Now, Milo will allow crypto traders to do the same. Rupena came up with the idea in 2017, when he was working at Morgan Stanley, he said. He had been interested in how crypto could allow people to “transfer money anywhere in the world”. At the time, crypto was a $400 billion asset class, but Rupena believed (correctly, it turns out) that it could reach $3 trillion by 2022. Traditional lenders don’t like to accept crypto, so crypto-rich people often have to convert their crypto to US dollars to buy a home, triggering a tax bill if they make a profit. .
Rupena realized that new institutions would need to “connect the rails” between digital wealth and real-world assets like cars and homes.
While he thinks Milo’s tax benefits are significant, Rupena said his product’s greatest value is in its ability to return customers their Bitcoin once they’ve paid off the loan, meaning that they do not lack future gains. Rupena told Motherboard that selling Bitcoin can be an extremely emotional decision. In a statement, the company linked to an Insider article about venture capitalist Chamath Palihapitiya’s unfortunate decision to sell Bitcoin to buy property in the mid-2010s.
“You don’t really want to sell it,” Rupena told Motherboard.
“There’s a strong incentive for someone to keep making payments,” Milo’s CEO said. “They don’t want to lose their Bitcoin. They don’t want to lose their property.
Bitcoin enthusiasts often argue that the currency is meant to be used to buy and sell goods, but Milo seems to have admitted that it’s mostly an investment that people don’t want to use to transact, less on the scale necessary for home ownership.
“Keeping your crypto is just as important as buying it,” the company declares also on its website. “Our strategy matches yours – keep HODLing.”
Real estate and cryptocurrency have become increasingly intertwined in recent years as the two asset classes have grown in value and importance. Other companies offer encrypted installments and hit NFT mortgages in different ways. One startup even goes the other way and offers mortgages to buy metaverse real estate.
Notably, Milo interest rates are currently in the 5-7% range, higher than many rates for traditional mortgages right now. But Rupena believes that Milo is not competing with traditional players, but with current companies offering crypto loans, which may come with even higher interest rates and collateral requirements than Milo requires. .
More broadly, Rupena doesn’t see Milo as a competitor for people with “perfect profiles,” including “perfect credit,” “very stable employment,” and tax returns. He wants to expand access to those with crypto wealth who are currently “unbanked” when it comes to mortgages.
One of Milo’s investors, Hans Thomas, co-founder of New York-based venture capital firm 10X Capital, pointed out to Motherboard that recent surveys found that nearly half of crypto traders are not white, like this recent survey do. Thomas is optimistic. Milo’s new product will help “democratize access to the financial system” and open up to those with “unconventional assets” that have historically been excluded from ownership.
(Others think differently: Citing similar diversity numbers, Nobel Prize-winning economist Paul Krugman recently called cryptography “the new subprime” in the New York Times.)
Mortgage lenders usually aren’t as willing to lend to unconventional housing seekers because they fear they won’t be able to repay the loan, but Milo doesn’t have to worry about that because the client has essentially offered all the money. at the outset, said Rupena. If customers miss a payment, Milo simply withdraws the necessary amount of Bitcoin from the pot.
Milo said that if a client’s bitcoin-to-loan ratio drops below 65%, the company will require a “risk margin call,” meaning clients will have to shell out more money.
“Because I have a lien on the property, and now have Bitcoin, there’s a strong incentive for someone to keep making payments,” Rupena said. “They don’t want to lose their Bitcoin. They don’t want to lose their property.
Customers can also theoretically lower their rate over time. As the loan is paid off – or if the price of Bitcoin increases – customers can either leave their extra funds at the custodian and benefit from a reduced rate, or withdraw them over time on the anniversary of the loan. (“as long as the crypto to loan ratio remains at 1:1”). They can also hand over more Bitcoin in order to lower their rate.
Rupena is unafraid of Bitcoin’s inherent price volatility, which he sees as having both huge upsides and downsides. (In mid-November, the price of a single Bitcoin rose to $67,000, dropping to $35,000 in mid-January.) Such fluctuations are one of the reasons why Rupena believes enthusiasts crypto would do well to diversify their wealth with real estate.
But the company has also built the potential for price change into its business model. When Motherboard asked about theoretical future volatility, Rupena said that if a client’s bitcoin-to-loan ratio fell below 65%, Milo would require a “risk margin call,” meaning that customers will have to shell out more money. If they don’t have any money, Milo starts tapping into the third-party account.
“We will really have to liquidate Bitcoin to stay within risk and tolerance parameters because this client – since the start of the loan – has not pledged any dollars or anything in the actual transaction,” Rupena told Motherboard. . “That’s how we mitigate some of that risk.”
If the value of Bitcoin fell to 30% of the loan amount, Milo would go even further, liquidating the Bitcoin and converting it to US dollars.
Milo, who says he has tested his model and considers the risk to be “acceptable”, hopes that the product will be operational in the coming months.