Can We Pay Mortgages with Bitcoins?

If you’re tired of mortgages, banks and fees then you might want to consider a new financial product, something called Bitcoin. A least that’s been the pitch from a number of backers, people who would prefer to see money as a form of secure digital currency outside the orb of traditional banking, a form of finance that can be used worldwide without steep transfer fees. Indeed, this year one Manhattan-based real estate firm, Bond New York, said it would accept Bitcoins for real estate transactions.

Bitcoin CoinIt’s not an unattractive idea for many households and the concept was gaining some acceptance until the past few days when it was discovered that a Tokyo-based Bitcoin exchange, a company named Mt. Gox, had lost artificial currency worth perhaps $450 million or more. We don’t know the exact loss at this writing, but then we don’t know whether the missing Bitcoins were lost or stolen. Indeed, it’s not clear what you could do with an errant Bitcoin if was stolen given that it’s merely a bunch of representational numbers.

To understand what’s going on here — and to figure how Bitcoins might play a role with mortgages and real estate — we need to talk about currency.

Bitcoins and Cash

Back in the good old days, when folks lived in caves, you can pretty much imagine that barter was the exchange system of the time and that it was easy to trade pelts for arrows or corn for meat. Barter worked fairly well on a local basis but the concept did not hold up as people began to travel and trade over long distances. Eventually metal coins came into use, coins which had an agreed value, say three Katanga crosses for a sheep.

Coins worked fairly well because there was an accepted value for metal and coins could be weighed, but then came paper currency and a new idea was needed, that a piece of paper had a given value because everyone agreed that it did. In the current era, we believe that a dollar is worth a dollar because it’s backed by the “full faith and credit” of the United States government. We also believe that a lot of other currencies have different values: for instance, a dinner in Bucharest that cost 500,000 old lei (pronounced “lew”) including salad, bear, and dessert — about $13.50. And the bear was excellent.

The catch is that a lot of people like money but they don’t like currency. In some cases they’re not too sure about the “full faith and credit” thing, while many people simply dislike all the fees and charges required to get at their own cash. There has to be an alternative and surely in the electronic era we can come up with something outside the usual banking system. Enter Bitcoin.

How Bitcoins Work

“Bitcoin is a consensus network that enables a new payment system and a completely digital money,” says Bitcoin.org. “It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet.”

Bitcoins, it can be argued, are not really too different from online bill paying. If you want to buy a book, shirt or hard drive you enter account information, and shortly thereafter your purchase arrives.

No less important, backers suggest that Bitcoins come without the fees and charges that we pay for using ATMs, credit cards and checks. In this sense — if true — Bitcoins are a threat to the traditional banking system.

Bond New York outlines these Bitcoin advantages:

  • Mobile payments are made easy – no sign up, swiping or PIN needed.
  • Security — Transactions are secured by military-grade cryptography. Nobody, it is thought, can charge anyone or make a payment on others’ behalf.
  • Works anywhere, anytime.
  • Fast international payments.
  • Zero or low fees.
  • Identity protection.

Clients who work with Bond New York may actually be prime Bitcoin users in the sense that Manhattan draws a large number of real estate buyers from across the world, people who might benefit from a common alternative currency.

Bitcoins and Mortgages

In the same way that a dollar is worth a dollar because everyone thinks it is, the value of a Bitcoin is determined by public acceptance. Bitcoins can be moved worldwide at electronic speed without public knowledge, regulation or fees — or at least that’s the theory. Whether one day it will be revealed that the National Security Agency has tapped into the system is unknown and, for the moment at least, unknowable. As to that military-grade cryptography, the jury is out on that one until the Mt. Gox situation can be better understood.

Bitcoins might also be used as a mortgage alternative. Imagine that you want to purchase a $300,000 property. Instead of cash, pay in Bitcoins. At this writing, a single Bitcoin on some exchanges is worth about $550.00, a value that may go up or down. At this rate it would take roughly 545 Bitcoins to buy the property

But — and here’s the chilly part — in the same way that the market value of a dollar or an old lei can go up or down, the same is also true with Bitcoins. At this writing, for example, the value of a Mt. Gox Bitcoin has fallen more than 60 percent.

Bitcoins and the Law

“The Department of Justice recognizes that many virtual currency systems offer legitimate financial services and have the potential to promote more efficient global commerce,” said Acting Assistant Attorney General Mythili Raman in testimony last year before the Senate Committee on Homeland Security and Governmental Affairs.

However, she added that “the Department has two primary law enforcement interests in virtual currency: (1) deterring and prosecuting criminals using virtual currency systems to move or hide money that is used to facilitate, or is derived from, criminal or terrorist acts, i.e., money laundering; and (2) investigating and prosecuting those virtual currency services that themselves violate laws aimed at illegal money transmission and money laundering.”

Bitcoin was developed in 2009 and five years later has become the subject of widespread interest and speculation. Is artificial currency for real? Is Bitcoin the alternative currency of the future? At this point we simply don’t know, but the experiment is sure to continue, whether through Bitcoin or another form of electronic currency. Meanwhile, what would you trade for a Katanga cross?

Peter G. Miller is a nationally-syndicated columnist, speaker and writer whose work appears in a variety of outlets online and off. He is the author of the Quick & Dirty financial eBooks (SilverSpringPress.com) and operates the consumer real estate site, OurBroker.com. More than 250,000 Miller books are in print.

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