Just when you think you understand the world of cryptos, all you understand is how little you know. And when you do actually master a topic, it will change. Which is why to get you started, we’ve put together a 101 guide to cryptocurrencies and real estate transactions. From the technology behind digital currencies such as Bitcoin to their risks, the real estate market is ripe for potential when it comes to this burgeoning market.
Ethereum, Ripple, and Bitcoin–three of the most popular forms of cryptocurrency. Via Pixabay.
What IS cryptocurrency?
Cryptocurrencies are digital currencies that use encryption called cryptography. The encryption is used to regulate the creation of the units of currency to control a single use per transaction. Encryption is also used to verify the transfer of those units: since it’s digital you do not end up with a physical coin, so the encryption also controls one user holds each unit. Cryptocurrencies are peer-to-peer meaning that they operate independently of a central bank. The most well-known example of a cryptocurrency is Bitcoin but there are over 1,000 others with new ones being “minted” every day.
Blockchains are used to track the transfer of cryptocurrencies. A “block” is a list of the transactions of a cryptocurrency unit and a blockchain links those transactions together. The concept of the blockchain is that every transaction a single cryptocurrency is involved in is digitally recorded and immutable. Generally, blockchains are arranged chronologically but they don’t have to be. One of the most significant players in the blockchain space is currently IBM (yes, the 106-year-old company is on the forefront of this craze). There are a variety of blockchains and they can be public, private, or permission-based.
Inherent risks of cryptocurrencies
Because cryptocurrencies are peer-to-peer, they do not have a central bank.
Like most currencies, they can be lost but cryptocurrencies can only be lost if the owner loses their private key (which is a code of about 60 letters and numbers). James Howells, an IT worker living in the United Kingdom, misplaced 7,500 bitcoins. At the time the article was written, the value of 7,500 bitcoins was $127 million (today’s value would be less than half of that, only $60 million). Technically, Howells knew where the bitcoins were – under four years of garbage in a landfill on a broken computer -but his local city council won’t let him try to retrieve the computer to get his key. There are numerous stories like this.
Cryptos do not have a standard set of rules and codes. There are voting standards but they differ from one to another.
Cryptos fall under a number of regulatory bodies. The SEC considers cryptocurrencies a security, the CFTC considers them commodities, the IRS considers them property, and so on. There are a variety of agencies with various monikers that have some oversight but no one agency oversees all crypto transactions.
Buying Real Estate with Cryptocurrencies
Last week, the first Bitcoin property transaction closed in NYC. So what issues are involved with buying a property with a cryptocurrency?
Cryptos take out the need for a middleman. There is no payment processor necessary for a buyer to pay a seller. The two simply need to agree on the sale price and the buyer sends the allotted amount to the seller’s wallet (like BitGo and Xapo).
The digital nature of cryptocurrencies makes transactions much faster. It can be completed in minutes or hours.
Typical real estate transactions require title insurance and appraisals. Once the blockchain technology is up and running on home records, neither of those will be necessary but until then, they are still necessary.
Avi S. Tryson, an attorney at Focus Title Group, said, “While I have been approached to close some bitcoin transactions, they all fell apart because none of the title insurance underwriters will insure a title where the property is being paid for in bitcoin (or any other cryptocurrency for that matter) and every buyer wanted to get a title insurance policy.”
One insurance that cryptocurrencies require but typical cash/mortgaged real estate transactions do not, is an insurance that pegs the cryptocurrency value to the agreed upon value of the sale. Since cryptocurrency values change faster than Clark Kent in a phone booth, the value at the exact point of purchase agreement could be wildly different an hour later.
When instituted, the blockchain technology could eventually get rid of many of the “middlemen” involved in real estate. Currently, on average, there are around 50-70 touches on a typical real estate transaction. According to Allied Title and Escrow, if the these “middlemen” (or touches) are eliminated/reduced, it could get rid of the current loan fees, real estate taxes, and other fees and commissions.
So, there are the basics of understanding a real estate transaction with cryptos. An expert in the field told 6sqft, “Honestly, only after two straight months of studying this topic can you even begin to understand the fundamentals of cryptos.” That is about the only thing to be said about cryptos with certainty!