Cryptocurrency has become a legitimate investment opportunity, attracting the attention of large institutional investors seeking to take advantage of the tremendous growth of cryptocurrency to enhance personal and corporate profits. For those involved in real estate transactions, this new technology creates challenges to those who attempt to navigate a largely unregulated area of the law, while also attempting to apply current regulations to crypto transactions.
CAN YOU PURCHASE REAL ESTATE WITH CRYPTOCURRENCY?
Crypto-based real estate transactions can be structured by purchasing the property using unconverted cryptocurrency. That said, many sellers, closing agents, and brokers involved may be reluctant to accept cryptocurrency that is not converted into U.S. dollars. Their reluctance is often because the price of Bitcoin, unlike securities, constantly fluctuates, even outside of business hours. This may deter risk-intolerant sellers from accepting cryptocurrency offers. If the price of a particular coin were to plummet, the buyer may not have sufficient funds to proceed with the sale.
In addition, real estate professionals facilitating the transaction may not be willing, or not set up to accept cryptocurrency. Closing agents holding funds for buyers until closing are required by law to keep those funds in separate trust and escrow accounts that must balance at the time of closing. Unlike cash or loan proceeds, cryptocurrency cannot be deposited in most U.S. bank accounts, and are instead held in virtual wallets managed by third party services such as Coinbase. A decrease in the price of the coins on the day of closing may result in a deficiency in the closing agent’s settlement account.
Even if the closing agent has the ability to open a virtual wallet, their risk exposure remains high, as the current rules governing closing agents and attorney management of client funds remains largely silent on cryptocurrency. Any buyer who intends to purchase real property with crypto should ensure that the closing agent is comfortable with handling a crypto-only transaction and ensuring that they have sufficient funds should the price of the coins fall.
ANTI-MONEY LAUNDERING AND BLOCKCHAIN
Cryptocurrency utilizes blockchain technology to engage in secure and anonymous online transactions between parties. The anonymity has led to criminal enterprises conducting transactions through cryptocurrency, which effectively masks them. In all real estate transactions, professionals must be cognizant of possible fraud or money laundering. Typically, banks are the first line of defense because they are subject to federal anti-money laundering regulations. Those regulations do not apply to crypto wallets, therefore the burden to ensure funds are legitimate falls on the real estate professionals to a much greater degree.
WHAT LIES AHEAD?
The shift to cryptocurrency will require additional regulation before becoming a mainstay in the real estate industry. The potential risk exposure for professionals will likely prevent most crypto-only transactions from happening.
In contrast, crypto to U.S. dollar conversions will likely become more common. For buyers, sellers and real estate professionals alike, it is critical to understand the outcomes and potential risks associated with buying real property with cryptocurrency.
Alessandro Secino is an associate real estate attorney with Henderson Franklin, Starnes and Holt whose practice primarily consists of commercial and residential real estate transactions, title issues and riparian rights/water law. He may be reached at firstname.lastname@example.org or at 239-344-1268.