This week, Mississauga made international headlines when it facilitated the first ever condo sold via crypto transaction in Canada. The list price? – 35 Bitcoin.
As cryptocurrencies surge in popularity, and become an increasingly normalized facet of our economic landscape, it’s no surprise that financial analysts are questioning their role in the real estate market. Will transactions of this kind catch on, or remain an exception?
Traditionally, the volatility of Bitcoin and other cryptocurrencies has posed a risk when it comes to real estate and other high-value transactions. Bitcoin’s value swung up from $1,000 to $20,000 and then back down to $13,000 in 2017 alone, and can fluctuate sporadically from minute to minute. When Bitcoin’s value changes, it drags along smaller cryptos like Ether and Ripple with it.
But volatility appears to be no threat to Derryn Shrosbee, seller of the aforementioned Mississauga condo, and his real estate agent Brett Starke, who both believe that cryptocurrency is the future of real estate. The property received an accepted offer within 4 days, at an equivalent value of roughly $443,000. In an interview with The Star, Shrosbee disclosed his plans to use cryptos for all his future real estate transactions.
So, which precautions did the sales team take to mitigate risk in the transaction?
Firstly, the price of the listing was changed daily on MLS to reflect the latest value of Bitcoin. Since Bitcoin is traded online has no fixed price, a clause was also added in the sales contract in which the buyer would be bound to the value of bitcoin on closing day. This would protect the seller in cases of the value plummeting. During the short period of time during which the property listing was active, Bitcoin’s value fluctuated by 3 Bitcoins – CAD $36,234.92 as of March 8th, 2018.
The contract also included a clause at the request of Derryn’s lawyer, stating that the offer must be reviewed by a separate lawyer representing each party.
While listing a property in Bitcoin may be perceived as limiting the buyer pool, a bitcoin property is in fact accessible to all buyers. A traditional bank mortgage can be converted to Bitcoin, and applied towards the purchase. Fears surrounding the reliability of cryptocurrency may have deterred a segment of interested buyers, but the property was nevertheless successfully sold within a short timeframe.
According to the sales team, the listing generated much interest from international buyers in Monaco and New Zealand and from within Canada. Interestingly there were no inquiries from the United States.
Seeing the amount of interest and media hype generated from Bitcoin transaction, it would not be a surprise if other real estate agents attempted the same approach.
In fact, several pre-sale listings in Toronto already exist on CryptoNomos, a website based in Bermuda which allows people to buy or sell properties using digital assets.
The Real Estate Council of Toronto is also reviewing the use of cryptocurrencies on the real estate market, recognizing the growing possibility that digital transactions may become common practice in Canada.
“While we recognize the merits of new forms of currency in the age of evolving digital commerce, RECO, as a regulatory body, must ensure that all business transactions between consumers and real estate salespeople, brokers, and brokerages, adhere to the Real Estate Business and Brokers Act”
However, RECO refrains from regulating private buyers and sellers, and so if a sale were to occur without the aid of a brokerage, RECO would be unable to determine the legality of that transaction.
As of today, cryptocurrencies are not recognized as legal tender in Canada, unlike Sweden and Japan where Bitcoin was recently introduced into the national banking system.
In January 2018, the regulatory body for licensed realtors in B.C. (Real Estate Council of British Columbia) banned the use of cryptocurrencies in real estate transactions overseen by a brokerage. Specifically, the ban prevents real estate brokers or notaries from holding a bitcoin deposit in a trust account. In BC, all deposits on homes must be, by law, held in trust unless stated in the sales contract.
In Ontario, there has been talk of following BC’s lead, but the boundaries of regulation are still being hashed out. It is worth noting that presently, crypto transactions are perfectly legal if traded between two individuals, without the use of a brokerage.
Meanwhile, south of the border, cryptocurrency seems to be fuelling international buyers seeking to invest in the United States while avoiding unstable banking systems at home. According to the online real estate marketplace Redfin, 75 properties listed in California and Florida accept Bitcoin as a means of payment.
While it is clear that cryptocurrency is going mainstream fast, Shrosbee is nevertheless an early adopter when it comes to their use in real estate. For the time being, the risks still seem to loom large in the eyes of the general public.
The biggest is the inherent volatility of digital currencies, which makes for a risky investment when dealing with assets worth hundreds of thousands or millions of dollars. Since 100 Bitcoin can be worth $3 million the day the offer was made and $1 million the next, how can a seller be sure that the buyer will have enough Bitcoin to complete the transaction?
Another risk is that of regulation – as Bitcoins compete with government currency, they may be regulated or banned at the national or provincial level. The lack of umbrella regulations regarding cryptocurrency raises concerns regarding their liquidity and long term value.
Furthermore, since Bitcoin are a digital, decentralized and uninsured currency, storing large amounts on a virtual system could potentially pose a security or fraud risk. If a hacker gains access to a Bitcoin owner’s encryption key, they could transfer the entire sum to another account without a trace. Several bitcoin users have protected themselves against this risk by using a paper wallet – a printed out version of the key which is kept offline in a safe location.
Lastly, most buyers choose to insure their investments with a governmentally recognize bank. At this moment, Bitcoin accounts are not insured by any government or federal program.
That is not to say that these risks will not be addressed and minimized over time, using the same blockchain technology native to cryptocurrency. For example, European fintech rolled out Brickcoin in June of last year, a crypto underpinned by blockchain and backed by real estate held in REITS (real estate investment trusts). By backing up their digital and liquid currency, Brickcoin protects users against volatility and other risks entailed in buying Bitcoin, which is unsecured by any mainstream asset.
It will be interesting over the coming years to see how the cryptocurrency and the real estate industry influence each other – and how they overlap based on changing market conditions and government regulations.
Any thoughts? Please leave them in the comments!
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