What Bitcoin Can Do for Commercial Real Estate
The commercial real estate industry isn’t always the first to innovate or adapt new technology, but bitcoin could be the breakthrough that bucks the trend (after leasing and asset management, of course). Advances like bypassing bank fees, transferring funds instantly around the world, and eliminating barriers to entry are those sorts of breakthroughs, and bitcoin and blockchain technology promise to make them a reality.
What Exactly Are Bitcoin and Blockchain?
Bitcoin, powered by blockchain technology, is a digital currency that regulates its own supply and verifies the transfer of funds. A blockchain is a shared public database that anyone can access and record information to. Once a piece of information is in the blockchain, it’s timestamped and permanently linked to the previous piece of information inputted (hence the chain concept), meaning that once something is in a blockchain, it can’t be removed or altered.
That stability makes blockchains a strong enough system of record to act as public ledgers for financial transactions. Those transactions use bitcoins as currency (one bitcoin is currently worth approximately $600 USD, down from a high of $1,060 in late 2013). Thanks to blockchains, bitcoin transactions operate independently of any bank, letting users completely bypass all bank fees. And since it’s digital, it can be used for global transactions just as easily as domestic ones.
Being able to instantly transfer funds internationally without needing a bank is a groundbreaking promise to many industries, one that financial experts say could save trillions of dollars in transfer fees. Since blockchains are permanent databases backed up by tight security and automatic record-keeping, they could be used to store anything from ownership titles to financial data--without the risk of fraud or mistakes.
What it Means for Commercial Real Estate
For CRE, this could cut costs and increase efficiency by enabling secure, direct peer-to-peer payments. As Ragnar Lifthrasir points out in a guest post on Duke Long’s blog, these types of payments could eliminate the need for some of the middlemen in CRE transactions. Think about transferring a deed. Right now, that requires assistance from lawyers, notaries, and government officials. With blockchain, all you’d need is a computer with internet access.
Bitcoin could also open markets and make it easier for more people to invest in real estate through a process called secure asset fractionalization, as blockchain entrepreneur Matthew Roszak explains in a piece for NAIOP:
“Secure asset fractionalization can be made possible with blockchains, and could enable an individual to finance and own a small share of commercial real estate. Most people on Main Street can’t afford to own a shopping mall, but fractionalization would allow you to directly own 1/10,000th of a shopping mall. This can be a small yet powerful (at scale) step toward growing an investment portfolio.”
There are currently too many variables at play for anyone to buy a tiny fraction of a property, but bitcoin would make it possible by enabling anyone to pay a developer for as much, or as little, of a property as they wish.
Roszak also discusses how bitcoin could improve CRE supply chains. The use of “smart contracts” could make it possible to set up performance-based payments that only trigger when a construction site hits certain milestones. An owner or developer could then create a secure system that automatically pays the construction company based on the progress they make. These payments would be fully documented in the blockchain and could serve as a complete record of payment while also keeping track of the building’s progress towards completion. It’s also possible that these smart contracts could function without an attorney’s input, further reducing costs.
Are these Promises Going to Pay Off Anytime Soon?
Most brokers and developers do not accept bitcoin today, but transactions involving digital currency are becoming more common. More real estate crowdfunding sites are following RealtyShares’ example and accepting bitcoin-based investments while brokerage firm BOND has allowed the use of bitcoins for property transactions since early 2014. On the residential side, someone bought a property in Lake Tahoe in 2014 for $1.6 million using bitcoins and it was such a good experience the seller said they’d be happy to use them again.
Those examples aside, don’t expect major owners to start accepting bitcoin right away. Cryptocurrency is still in its infancy, and there are still concerns over its volatility, safety from hackers, and even reputation given that it’s the currency of choice for illicit online purchases. But CRE is an entrepreneurial business, and the top professionals are often willing to try something new to drive ROI and make deals happen.