How will Cryptocurrency affect the property industry?
We are delighted to bring you this original and insightful thought piece written by the winner of our Cambridge Finance competition - Holly Brown. We hope you enjoy it as much as we do!
A Cryptocurrency can be defined as a digital or virtual currency that uses cryptography for security. The most commonly known cryptocurrencies are Bitcoin and Ethereum and are currently unregulated but coming to the attention of governments and regulators. Cryptocurrencies are not legal tender, cannot be used to pay taxes or used to settle debts. Cryptocurrencies are becoming an increasingly prevalent topic of discussion that can no longer be ignored by the property industry. This was demonstrated by last week’s front-cover news that Lloyds Banking Group and Virgin Money have banned customers from buying Bitcoin and additional digital currencies with their credit cards, and this week the Shadow Treasury Minister highlighting the need for speedy regulation of cryptocurrencies. However, the hype surrounding cryptocurrencies is not necessarily because of the digital currencies themselves, but instead fuelled by the financial applications and payment systems built on the underlying digital ledger technology that stand to potentially disrupt consumer and investment markets. In this thought piece, I will outline how blockchain, smart contracts and ICOs have, and will continue to have, a significant impact on the property industry.
Blockchain technology is a digitized, distributed ledger that immutably records and shares information2. A blockchain logs information that are grouped in blocks and subsequently connected through a cryptographic procedure in an ever-expanding chain3. In cryptocurrencies, such as Bitcoin or Ethereum, information stored on the respective blockchains are transactions of crypto coins between two parties. Blockchain technology could improve inefficiencies and inaccuracies in the real estate industry, and improve transparency in a market that is inherently closed and secretive.
Blockchain technology will hugely impact the property industry by enabling a multiple listing service (MLS) common database to be built that collates property-level information from private databases of brokers and agents. Once several payments and transactions are recorded on the blockchain, along with the property details, real-time data analysis can be performed using the appropriate analytical tools. Attempts at creating an effective and efficient MLS using blockchain technology have already begun, for example Rex-MLS is trying to revolutionise Corporate Real Estate listings worldwide, allowing users to freely access the data and carry out transactions using Rex’s cryptocurrency4. However, such technology is only set to greatly impact the property industry if there is government involvement as highlighted by Propy, a platform that aims to enable the buying and selling of property worldwide using Bitcoin. Propy is the first to understand that transactions using blockchain technology must be recorded on an official ledger that is legally binding and recognised by all parties5, such as the Land Registry in the UK. Sweden have been evaluating the possibility of using blockchain technology in managing its land registry since 2016. If government backing of official ledgers spreads, blockchain technology and smart contracts will revolutionise the real estate industry.
Smart contracts are software programmes embedded in blockchains that can receive as well as send assets and information6. The essence of smart contracts is the automatic and fully predefined execution of certain contractual obligations once pre-defined conditions are met. If official ledgers for property ownership via platforms such as Propy gain greater government support, real estate assets can be managed and transferred using blockchain technology via smart contracts. Therefore, smart contracts can create investment vehicles that automatically execute investment decisions and govern the collection and distribution of funds on a blockchain.
The effect of smart contracts on the property industry is already evident demonstrated by the first house sold using a smart contract on the blockchain online ledger Ethereum. Propy entered an official partnership with the government of Ukraine to pilot the blockchain title registry Ethereum7. The transaction occurred entirely via smart contracts on the Ethereum blockchain using cryptocurrency. This will greatly impact the property industry by eliminating paper contracts and costly lawyer fees, make properties easier to sell to overseas buyers and most importantly enable a legal transfer of property ownership using digital ledger technology. Furthermore, smart contracts can be used for lease agreements whereby key terms of the agreement are recorded on the blockchain. The smart contract can then initiate payments of the security deposit and advance rent using cryptocurrency. The lessor then transfers the possession of the property to the lessee and consequently the transaction agreement is officially recorded on the blockchain.
Initial Coin Offerings (ICOs) are forecast to have a huge impact on industries, with organisations having raised over $1.8 billion through ICOs since January 20178. The exchange of tokens for crypto coins on a blockchain has become an easy and increasingly used alternative form of funding for start-up companies. Instead of tackling strictly regulated traditional venture capital funding, companies design tokens that can embody any rights and obligations for token holders. Although strictly regulated traditional venture capital funding is attractive to investors, as it requires prescribed transparency and disclosure to investors for companies/products listed on those markets, perhaps there is a need for regulated markets to be more flexible in their listing requirements to make it easier for small companies/start-ups to raise capital. Developers then outline their business idea, drum up support using social networks, and then sell tokens to those in exchange for crypto coins on a blockchain. This will have an impact on the property industry demonstrated by Paragon, who intend to open a brick-and-mortar co-working space in which only "paragons" are accepted9, which threatens traditional co-working space such as WeWork.
ICOs are additionally set to have a major impact on the property industry by enabling many people to co-own a property in a similar fashion to how shareholders jointly own a company. ATLANT based in New York, is experimenting with a form of blockchain-supported property ownership that would enable this10. Each property listed and sold on the blockchain runs its own ICO on the ATLANT platform. The quantity and value of the token is linked to the sale price per square footage of the given property, and once all the tokens for a given property are sold, the funds are released to the seller, and the property is consequently owned by the ATLANT community.
There is an urgent need for cryptocurrencies to be regulated, with Europol stating £3-4 billion is being laundered via cryptocurrencies in Europe every year11. This is likely to greatly impact the property industry due to the police having no control over freezing assets on a blockchain that is being moved by unidentifiable criminals. The Shadow Treasury Minister, Alison McGovern, has urged regulation needs to be implemented imminently. Additionally, another problem identified by Europol is the method that criminals use to launder money. Proceeds from criminal activity are being converted into cryptocurrencies such as bitcoin, divided into smaller amounts and distributed to individuals who are seemingly not associated with the criminals otherwise known as "money mules"12. Therefore, if real estate assets start being legal owned and transacted on blockchains, they are at great threat of financial crime as money mules convert the bitcoins back into hard cash with the police having little chance of identifying who is cashing the money out.
To conclude, cryptocurrency will have a monumental impact on the property industry by centralising a database with property details that will be more efficient, transparent, regulated and trustworthy. It will enable properties to be sold without paper contracts and costly lawyer fees, and enable rental payments and security deposits to be automatically released. They will assist in the funding of start-up companies that will threaten traditional real estate space, and perhaps the greatest impact, will be the possibility of creating a stock market like NASDAQ that will enable individuals to invest in "shares" of a property. It is integral there is greater regulation for cryptocurrencies to tackle anti-money laundering and financial crime, and in turn more governmental ledger regulation could enable platforms such as Propy to successfully sell real estate via a blockchain using cryptocurrency. It is the financial applications such as smart contracts and ICOs, rather than cryptocurrency itself, that is set to revolutionise the real estate industry.