The credit system we are familiar with is rapidly changing and is gradually accepting cryptocurrencies in new ways every day.

Written by: Prathik Desai

Translated by: Block unicorn

Introduction

There is an ironic phenomenon in modern finance. You might hold $400,000 worth of Bitcoin, yet struggle to get approved for a $300,000 mortgage. Your digital wealth may make you look rich on paper, but when you actually want to purchase a substantial commodity like a house, it seems invisible. This is especially true if you do not have a good credit history.

This absurd phenomenon makes me wonder: if wealth is real, why is it not recognized?

On Monday, this absurdity took a step closer to resolution.

The newly appointed director of the Federal Housing Finance Agency, Bill Pulte, tweeted.

Within hours, elites in the cryptocurrency space responded.

Michael Saylor proposed his Bitcoin credit model. Jack Mallers from Strike volunteered to make Bitcoin-backed mortgages "a reality in the U.S."

The signs are clear: the credit system we know is rapidly changing and is gradually accepting cryptocurrencies in new ways every day.

28 Million "Financial Ghosts"

Approximately 28 million adults in the U.S. are classified as "credit invisible" by regulators. They exist in the economy: they work, earn, and spend, but do not exist in the eyes of banks. They have no credit cards, no student loans, and no mortgage records. They are merely financial "ghosts," possessing intact funds but lacking a Fair Isaac Credit Score (FICO) to prove it.

According to Tom O'Neill, a senior advisor at Equifax, lenders have missed out on about 20% of credit demand growth in the U.S. because they have not chosen to add alternative data to traditional scoring models, making the extent of this exclusion even clearer.

Meanwhile, about 55 million Americans hold cryptocurrencies. This group may include a large number of individuals who are asset-rich in cryptocurrencies but credit-poor in the traditional system.

Think of those debt-averse immigrants, young professionals who never need credit cards, or global entrepreneurs who are compensated through digital assets. Some may hold enough Bitcoin but cannot qualify for a mortgage because their wealth is not registered in the FICO traditional scoring system.

Ironically, traditional banks have begun to recognize this issue.

In 2023, JPMorgan Chase, Wells Fargo, and Bank of America launched a pilot program that challenged decades of credit card approval processes. These lenders began approving credit cards by analyzing consumers' account activities—including checking and savings balances, overdraft history, and spending patterns—rather than requiring traditional credit scores.

Early results show that many excluded consumers actually have good credit; the problem lies in their financial history information.

What is the next logical step? To use cryptocurrency holdings as another form of alternative data. After all, if your bank balance, stock, and bond portfolio can be used to assess creditworthiness, why can't your Bitcoin balance?

The scale of this disconnect is clearer in the numbers. In 2023, the global loan market is one of the largest financial industries in the world, valued at $10.4 trillion, and is expected to reach $21 trillion by 2033.

On-chain lending accounts for only a small portion of this (0.56%).

Focusing solely on housing, the Federal Housing Finance Agency (FHFA) oversees institutions that provide over $8.5 trillion in funding to the U.S. mortgage market and financial institutions.

If crypto assets can be appropriately integrated into this mainstream market, you will see a flood of recognized collateral and participants.

Rather than forcing cryptocurrency holders to sell assets to qualify for a mortgage, lenders could view digital assets as legitimate collateral or proof of wealth.

Under today's rules, purchasing a $400,000 house means liquidating your cryptocurrency, triggering capital gains taxes, and forfeiting any future appreciation of the assets you could have held. It feels like being punished for holding the "wrong currency."

In a framework that embraces cryptocurrencies, you could use your Bitcoin holdings as collateral without selling, avoiding tax events, and preserving your digital assets while mortgaging real estate.

Some companies are already doing this in the private sector.

Florida-based fintech company Milo Credit has issued over $65 million in cryptocurrency-backed mortgages.

There are also other companies offering Bitcoin-backed mortgages, but they operate independently. Some of these operate outside the Fannie Mae/Freddie Mac system, which means higher interest rates and limited scale. Pulte's statement may push this trend into the mainstream.

Modernization is Inevitable

Traditional credit scoring is outdated. Banks review payment histories but overlook forward-looking wealth indicators.

Some decentralized finance (DeFi) protocols have begun experimenting with on-chain credit scoring.

Cred Protocol and Blockchain Bureau generate credit scores by analyzing wallet transaction histories, interactions with DeFi protocols, and asset management patterns based on demonstrated financial behavior.

A person with a stable on-chain transaction history and a healthy cryptocurrency portfolio may be more creditworthy than someone who is overdrawn on their credit card, but the current system fails to recognize this. Some progressive lenders have begun trying to use alternative data: rent payments, bank balance trends, utility bills.

So, what is hindering the rise of mortgage loans supported by cryptocurrency holdings? There is one issue.

The notorious volatility of cryptocurrencies could turn mortgages into a situation similar to margin calls.

Bitcoin fell by about two-thirds between November 2021 and June 2022. If your mortgage qualification relies on 1 Bitcoin worth $105,000 today, what happens if it drops to $95,000 tomorrow? A previously creditworthy borrower suddenly becomes a default risk, and it is not their fault.

If this situation extends to millions of loans, you have the makings of a real crisis.

This all feels familiar.

In 2022, European Central Bank official Fabio Panetta pointed out that the cryptocurrency market had surpassed the $1.3 trillion subprime mortgage market that triggered the 2008 crisis. He observed that there are "similar dynamics" between traditional markets and the crypto market: rapid growth, speculative booms, and opaque risks.

During a bull market, crypto wealth can appear and disappear at astonishing speeds. Aggressive lending based on inflated portfolio values could recreate the boom-bust cycle that destroyed the housing market seventeen years ago.

Our Perspective

Even if the FHFA moves forward, and Pulte has yet to provide a timeline or specific details, the actual obstacles remain daunting. How do you assess the value of volatile assets for lending purposes? Which cryptocurrencies qualify? Is it limited to Bitcoin and Ethereum? What about stablecoins? How do you verify ownership without fostering fraud?

Then there is the foreclosure scenario: if a borrower defaults, can banks really seize crypto collateral? What if the borrower claims their private key was "lost in a boating accident"? Traditional repossession involves sending agents to collect physical assets. Recovering crypto assets involves… well, just some digital alphanumeric keys.

Some challenges are being addressed by developing low-collateral mortgage protocols. Platforms like 3Jane have developed "credit reduction" mechanisms that bridge the gap between anonymous lending and real-world accountability. Their approach allows borrowers to initially maintain privacy, but a default triggers a process where collection agencies can access real-world identities and pursue recovery through traditional debt collection methods, including credit reporting and legal action. Borrowing anonymously, but defaulting comes at your own risk.

For cryptocurrency holders, Pulte's statement represents a long-awaited recognition. Your digital assets may finally be seen as "real" wealth in the eyes of mainstream finance. For the housing market, this could unlock a cohort of buyers who have been excluded due to outdated qualification methods.

But how this is executed will determine whether it becomes a bridge to financial inclusion or a pathway to the next crisis. Integrating cryptocurrencies into the mortgage space requires a level of cautious risk management that the financial industry is not traditionally known for.

The barriers between cryptocurrencies and traditional credit are beginning to crumble. Whether what emerges is a more robust and inclusive financial system or a more fragile house of cards will depend on how carefully we build the bridge between these two worlds.

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