Crypto-backed mortgages still raise red flags: B.C. regulator

B.C.’s mortgage regulator continues to sound warnings about anyone considering purchasing a home with cryptocurrency.

The BC Financial Services Authority says there is nothing prohibiting buyers from using such unregulated digital currencies, however there are limited protections and persisting unknown risks in doing so.

The concept garnered significant media attention in December when Toronto-based lender Ledn announced a $70-million investment for building a Bitcoin-backed mortgage product.

“This mortgage will enable Ledn clients to use their Bitcoin holdings to purchase a property while continuing to benefit from potential price appreciation of both assets,” the company wrote.

A client wishing to take out a Bitcoin mortgage needs to own as much Bitcoin equivalent to the property value or purchase price. The company will issue a loan equal to 50% of the combined value of both assets.

The authority warns that real estate brokerages and lawyers are unable to receive cryptocurrency deposits and hold them in trust for a real estate transaction.

“The buyer and the seller would need to negotiate for a third party to hold the deposit, which brings an increased level of risk. In a trust account, the funds are protected should the deal collapse. If the deal were to collapse using a digital currency, your client may have to find the other party and sue them to recover the deposit,” notes the authority, which oversees the financial services sector, including pension plans, mortgage brokers, real estate services, real estate development marketing, and financial institutions (credit unions and insurance and trust companies).

Other potential risks include how the currency may be used to disguise the source of money derived from criminal activities and thus be a vehicle for money laundering.

The authority also notes there are big swings in the currencies, making closing costs more of a gamble.

From its website the authority lists two examples of risks:

“There are reports that bitcoins have been used in some jurisdictions in real estate scams involving identity theft and title fraud. In some cases, a fraudster steals the identity of a property owner, and advertises their property for sale online for bitcoins. The buyer registers title and immediately takes out loans against the property, fleeing with the funds and leaving the actual homeowner in debt.

“In other cases, identity thieves have targeted properties already listed in the MLS and created fraudulent secondary advertisements to sell the same home for bitcoins.”