Can you buy property with Bitcoin?
There has been lots of talk about blockchain, bitcoin, and their ability to disrupt or even revolutionise the way we live, work and do business. But what can a cutting-edge, digital technology (understood by very few) have to do with the old-fashioned, bricks-and-mortar real estate industry (admittedly, also understood by very few)?
What exactly is blockchain?
First, we need to define what exactly blockchain is, and how it relates to bitcoin. In essential terms, a block is a book which records the details of a transaction. Each block contains a timestamp and a link to the previous block, so they form a chain. Hence, blockchain. So blockchain is essentially a digital ledger, like bookmakers have for recording bets. But this ledger is not managed by any one particular person or group. Instead, everyone in the network gets a copy of the whole database, meaning it is stored on numerous computer systems simultaneously, similar to a peer-to-peer network for file sharing. The blocks are encrypted to ensure that the record is accessible to anyone, but alterable by no one. Only a user who owns a special cryptographic key is able to add a new record. This means that old blocks are preserved forever, and new blocks are added to the chain irreversibly, making blockchain records impossible to change, fake or manipulate.
It is these essential properties which give blockchain its unique characteristics of decentralisation, transparency, and immutability, and which cryptocurrencies leverage to their benefit. Cryptocurrencies are essentially just entries in a database that can only be changed under specific conditions. The only thing which gives a cryptocurrency its financial worth is the collective belief in that worth. If that sounds flimsy, well it’s almost the exact same way the world’s financial markets work as well. So now that we have that (more or less) understood, let’s take a look at some potential uses for blockchain in the real estate industry.
Buying a property with cryptocurrency
Perhaps the simplest, most common, and easiest to understand use for blockchain is using an established cryptocurrency, such as bitcoin, to buy a property. If you have a considerable amount of cryptocurrency which you would like to transfer into a more solid investment (perhaps to avoid the volatility of the cryptocurrency market), then real estate would be a good option. Cryptocurrencies are becoming increasingly accepted as payment types in their own right (you can even use bitcoin to buy pizza from Pizza Hut!). This of course includes real estate. In fact, in January 2020, the real estate investment company BrickMark signed a purchase agreement for the largest ever real estate transaction paid in cryptocurrency tokens, of a total volume of over $135 million. Yet although it is certainly possible to buy property using cryptocurrency, and is becoming more viable, it is still a long way from being widely available. As the technology is still very much in its infancy, we are still missing out on some of the tools and infrastructure needed for such large transactions that involve digital currency and physical property.
Furthermore, as the technology (not to mention the concept) is still not clearly understood or accepted by the general public, a lack of trust remains around it. This means that there are a very limited number of entities willing to accept cryptocurrency as payment. This is even more the case for such a big-scale item as a house or apartment. And of course, it isn’t only a seller willing to deal in cryptocurrency that you need. You would also need to find a brokerage, a notary, and perhaps an escrow provider willing to support a virtual transaction. An additional thing to consider is the tax situation. Despite some incorrect assumptions and suggestions floating around, real estate transactions using cryptocurrencies are of course taxable by the relevant authorities. And because of the essentially immutable nature of blockchain technology, there is no way of hiding the value of the transaction from the tax authorities.
When it comes to investments, real estate is the biggest asset class in the world. In 2016, London-based real estate company Savills calculated the value of all global property, coming to a total of $217 trillion. However, the bar of entry into investing in real estate is prohibitively high for most people. They simply do not have the money necessary to be able to buy a property. Real estate is also one of the most illiquid investments you can make. It cannot be sold quickly or easily without a substantial loss in value, due to a lack of potential buyers. One of the most interesting potential applications of blockchain for the real estate industry is tokenisation. In simple terms, a token is a digital representation of a real-world asset or service, similar to using Disney Dollars at theme parks. It stands in for the value of something else. This has huge potential application in the tokenisation of real estate. A property could be divided into 500 tokens, which could then be sold to 500 different people, essentially crowdfunding the purchase of the property, or turning the tokens into “shares” to be purchased by investors.
This tokenisation will not only increase the liquidity of real estate, but it will also make it possible to trade those assets without a third-party. Instead of buying a property, you are really just buying tokens from an exchange. This lowers the bar of entry into investing in real estate considerably, making it far more achievable. Additionally, this kind of fractional ownership really brings the utopian, democratic ideals behind blockchain to the force. There is not a single, faceless corporation behind the property, but 500 people who are personally invested in its success.
However, perhaps the most influential aspect of blockchain, the facet which has the most potential within the world of real estate, is less glamorous and far more prosaic. It has to do with trust. Trust is of huge importance in a great many industries. But in real estate, trust — of a website, of a property listing, of an estate agent – is essential. One factor that blockchain technology provides more than any other is trust. The immutability and transparency of the records within a blockchain give it important real-world applications. You can use it to track documents and events during the purchase of a property, replacing paper land titles and deeds with true digital assets and tracking them on an unchangeable ledger. Everyone involved can see them, and everyone can trust exactly what they are seeing. This has huge implications in particular for banks, notaries and land registries. In 2018, the Swedish land registry, Lantmäteriet, trialled a system where a blockchain was designed to track documents during the sale of a property. The buyer and seller, brokers and banks involved could all take part in and keep track of the sale digitally. The transaction was fully compliant with European Union laws and regulations, including the GDPR privacy rules.
This could be taken one step further with so-called smart contracts. Smart contracts are automated contracts, with specific instructions written into the code which get executed when certain conditions are made, for example when specific payments are received. These contracts are already being used for certain types of insurance, and could have an impact on real estate contracts. The Georgian National Agency for Public Registry has built a blockchain add-on to their existing system, and are blending smart contracts into this transaction infrastructure. This may all sound like a lot of fuss over not very much, but it can have far-reaching consequences. A higher degree of transparency can help to combat corruption, tax evasion, and money laundering. The UN Office on Drugs and Crime estimates that around $1.6 trillion is laundered through real estate in a single year. As we mentioned above, because of the essentially immutable nature of blockchain technology, there is no way of hiding the value of property transactions from the tax authorities. If even a fraction of that crime is thwarted by blockchain technology, it is certainly worth pursuing.
So how seriously should we take blockchain?
Despite all the hype over blockchain in the last few years, the technology is still in its infancy, and we are missing some essential developments. The fact that the core concept is somewhat esoteric and confusing has done a lot to hinder its widespread adoption. However, countries such as Sweden, the UK, the Netherlands, Estonia, Dubai, Ghana, and Georgia have all developed applications to facilitate more efficient and smooth property transaction process. According to a report by the German newspaper Handelsblatt, more than 40 banks have already applied for a new crypto custodian license, a requirement to store digital assets on behalf of their clients. And a report by PwC states their belief that in the long run, blockchain will help to significantly increase market transparency and solve principal-agent issues____. If this many companies and authorities are taking it seriously, then that’s a sign that we probably should too.