You’ve likely heard about cryptocurrency and blockchain in recent years. The media continues to report on their rising use, benefits and possible applications, but what exactly are these technologies? How could they change the business of real estate?
Cryptocurrencies are a completely decentralized type of digital currency. While traditional currencies are issued by central banks—which determine when and how much of a currency to produce and circulate—cryptocurrencies are generated spontaneously and on an ongoing basis through a process called mining. Users dedicate computing power to solving complex mathematical puzzles—verifying pending transactions and, in the process, generating more of the currency. The complex calculations ensure the security and integrity of the whole cryptocurrency system.
A blockchain is a digital ledgering system whose records cannot be altered, making it extremely accurate. In blockchain language, each record of a transaction is a block. The ledger is a chain of these blocks—a grouping of transactions verified by the network. Instead of having a single computer store any one transaction record, blockchain uses multiple connected machines. This allows the computers to communicate and verify information about the transaction is the same. If one computer has different information, its record is treated as false and ruled out.
Using cryptocurrency in real estate
Josh Nekrep, a REALTOR® and salesperson with Century 21 Carrie, said cryptocurrency transactions are not common in Canada because they require a high level of technical expertise.
“REALTORS® understand cryptocurrency about as well as the general public,” Nekrep said. “Nearly everyone is at least vaguely aware of the technology but only a small—though growing—slice of the population actively participates in it.”
While cryptocurrencies have been used in real estate transactions in the U.S.—the largest involved a Silicon Valley entrepreneur who bought 1.4 acres of land in North Lake Tahoe, California, for 2,739 bitcoins (approximately $1.6 million U.S. at the time)—they are by no means common.
When cryptocurrencies are involved in property deals, it’s often indirectly: the buyer converts the digital currency to cash and uses it to purchase the property.
It’s hard to say to what extent real estate companies are using blockchain because there isn’t any public data available, but the technology is being used through platforms like U.S.-based Ubitquity, which bills itself as the first blockchain-secured platform for real estate recordkeeping. It works with municipalities and land record offices, title insurance companies and communities needing a clear record of property ownership.
Nathan Wosnack, Founder, President and CEO of Ubitquity said blockchain-secured transactions deliver faster and more accurate recordkeeping, reducing claims and operational costs and speed up closing times for REALTORS®.
Wosnack hopes to make the user experience as intuitive as possible. He hopes real estate professionals won’t be able to tell the difference between a blockchain-based database and a legacy one—apart from lookup speeds and more accurate results.
Not yet regulated
Allison McLure, our legal counsel said there don’t appear to be any regulations in Canada regarding the use of cryptocurrency in real estate. That said, if Canadians were interested in swapping their cryptocurrency for real estate it would be up to the realty company.
Real estate is regulated at the provincial/territorial level in Canada and authorities have yet to come out with rules around the use of cryptocurrency. The real estate councils of Ontario and British Columbia have investigated the topic and warn of risks, including cryptocurrencies being used as part of identity theft and title fraud.
Chad Curry, Director of the U.S.-based Center for REALTOR® Technology, a research group operated by the National Association of REALTORS®(NAR), said the regulatory situation is similar in the U.S. The Federal Securities and Exchange Commission has started to enforce existing securities laws for cryptocurrencies.
“I think they took a ‘wait and see’ approach early on,” Curry said. “Now they’re looking at how companies are using cryptocurrency to raise capital, even pursuing some for fraud. State by state, there is some work happening to define this for the local governments, but not much on the regulation side.”
In an unregulated environment, the potential does exist for cryptocurrency to be used for illegal acts like money laundering. Earlier this year, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) informed CREA cryptocurrencies are neither cash nor funds under its legislation.
Therefore, specific record-keeping and reporting obligations under Canada’s anti-money laundering laws don’t apply to virtual currencies. That said, the Government of Canada recently introduced regulatory amendments that will subject virtual currencies to these laws, which would make this policy interpretation irrelevant.
“While cryptocurrencies aren’t inherently suspicious, REALTORS® should nevertheless proceed with caution where they’re involved,” McLure said. She advises REALTORS® to review FINTRAC’s suspicious transactions guidelines and report any cryptocurrency transaction that raises a red flag.
Despite today’s regulatory uncertainty and the fact these technologies are still in their infancy, potential future applications in real estate are promising.
Not only could cryptocurrencies be used to buy and sell property but also to open up new investment opportunities—serving as tokens representing shares in a property. This could allow people to invest in major real estate holdings like office buildings or hospitals for smaller amounts of money than are commonly needed. Tokenized investors would reap returns and wield certain benefits like voting rights. Developers could also effectively crowdsource new properties by accumulating hundreds or thousands of cryptocurrency micro-investments from the public.
While cryptocurrencies still have some maturing to do, Nekrep said REALTORS® shouldn’t ignore them or think today’s shortcomings will always be present.
“It’s impossible to fully imagine how these technologies might be used,” he said. “If you think back to the early days of the Internet, no one could have predicted services like Netflix and YouTube. The speed, processing power and bandwidth didn’t exist at the time. In the same way, cryptocurrency faces a host of technical challenges that need to be solved. When they are, who knows what opportunities will emerge?”
As for blockchain, Wosnack said it will become the “plumbing of the real estate process”—used by municipalities, deed offices, e-recording agencies, title insurance companies and more to minimize fraud and corruption thanks to the inalterable nature of blockchain records.
According to Curry, there are also possibilities for blockchain on the asset management side, such as accurately tracking home performance and maintenance history.
With talk of automation and other technologies eliminating huge swaths of jobs, should REALTORS® be concerned that rather than make their jobs easier, blockchain could actually make them redundant?
“We’ve had members ask about blockchain replacing them,” Curry said. “The answer is, ‘no.’ There are certain portions of the process that will be streamlined but there is so much more that real estate professionals do that can’t be replaced.”