Citi’s Crypto Loan Risks and Metaverse Benefits

Cryptocurrency-backed loans pose risks as collateral liquidation may occur if values drop below a set threshold, like 35% of property value, warns a recent Citigroup report.

Citigroup, a prominent investment bank, has released a study exploring the impact of real estate technology on the housing market, with a focus on virtual real estate and cryptocurrency-backed loans in the metaverse.

In their report titled “Home of the Future: PropTech – Towards a Seamless Housing Market?” published on Wednesday, Citi suggests that crypto, blockchain, and metaverse-based property have the potential to revolutionize the traditional real estate market.

While crypto-backed loans streamline home purchases, there has been a noticeable uptick in investments in metaverse property in recent years.

Citi notes that real estate loans linked to crypto assets may offer investors a means to realize investment gains without incurring capital gains taxes.

However, they also highlight potential risks in a volatile market. Unlike fiat-backed loans with established regulatory procedures, crypto holders may face increased repayment demands if token prices plummet during a bear market.

The report cautions, “The borrower may be subject to margin calls if the value of the cryptocurrency falls, and eventually the cryptocurrency may be liquidated if the collateral value falls below a certain threshold, such as 35 percent of the property value. Including cryptocurrency exposure in the credit profile likely increases the overall risk of the loan.”

Additionally, Citi explores the advantages of owning and monetizing “digital real estate” on the metaverse, comparing it to physical property ownership.

The researchers delve into individual and corporate ownership of virtual property in The Sandbox (SAND), known as LAND, treating it as an investment akin to real-world property.

Prices for LAND ranged from approximately $100 per unit in January 2021 to $200,000 a year later, reflecting the speculative nature of virtual real estate investments.

While acknowledging potential benefits, Citi’s report underlines the lack of concrete development plans among most virtual property buyers, emphasizing speculation on the platform’s future and LAND value.

Notably, Citigroup isn’t the first institution to assess risks associated with crypto-backed loans. Prior to the recent bear market, Florida-based research firm Weiss Ratings had already cautioned investors about potential pitfalls, citing factors such as Bitcoin price declines, rising interest rates, Fed policy changes, and stock performance that could make crypto lending a risky proposition.

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