Cryptocurrency in real estate transactions

Some buyers and sellers also believe cryptocurrency transactions present a more seamless and secure method of recording and transferring title to property through the use of blockchain technology. A blockchain is a digitized public ledger used for keeping track of cryptocurrency transactions. Verification and record-keeping of transactions is performed by the blockchain itself. Using blockchain in real estate transactions can expedite title recording and reduce title disputes, due to blockchain’s accessibility and accuracy.

Supporters of blockchain are taking action for widespread use of the technology in real estate transactions. Though most jurisdictions still require the involvement of traditional financial institutions in real estate transactions, blockchain is gaining traction.

Sellers should be wary when agreeing to accept cryptocurrencies in real estate transactions since digital currencies are not adequately regulated and are subject to hacking and theft. Further, encryption in cryptocurrencies makes it nearly impossible for sellers to discern the true source of payment. This is especially problematic given the popularity of cryptocurrency as a vehicle for money laundering. Without the regulation of the banking system, sellers accepting cryptocurrency are susceptible to fraudulent or illegal transfers from buyers. To avoid these risks, sellers accepting cryptocurrency should be overly cautious and extensively verify potential buyers. Though cryptocurrency has recently been the subject of extensive regulation designed to reduce fraud, sellers must continue to exercise caution until comprehensive and reliable regulations have been implemented.

The volatile nature of cryptocurrency also presents risks for sellers. Since the monetary value of a cryptocurrency is constantly changing with the market, difficulties arise when the value fluctuates between the time of negotiating a sale contract and closing. If the value of the cryptocurrency drops after the contract has been signed but before closing, the seller stands to lose money on the transaction, whereas if the value of the cryptocurrency increases between the contract signing and closing, the buyer is incentivized to walk away from the deal. To prematurely resolve any issues resulting from these fluctuations, parties to cryptocurrency transactions should be sure to include a certain purchase price in U.S. dollars and a defined process for transmitting payment within the sale contract. The parties can also avoid difficulties by executing a futures contract with an investment bank to lock the value of the cryptocurrency at the time the sale contract is executed, avoiding the risk of unforeseen fluctuations in the time before closing.

Using cryptocurrency is also difficult since most companies involved in typical real estate transactions are unable to process deals using digital currency due to unfamiliarity with the technology. In transactions where the cryptocurrency is not converted to cash before transfer to the seller, the parties might have trouble with peculiars of the transaction. Further, for sellers who accept digital currency without requiring it first be converted to cash, the seller may be subject to a substantial capital gains tax diluting the value of the sale.

As further regulation increases the legitimacy of cryptocurrency, the benefits of using digital currencies like Bitcoin to finance real estate transactions will likely interest prospective buyers. Before agreeing to accept cryptocurrency in exchange for real property, sellers must be fully aware of the risks involved and exercise caution when negotiating with buyers.