It’s not just real estate, but many industries over the next few years will feel both gain and upheaval due to innovations in technology. In particular, banks and the real estate sector currently have their eyes on crypto-currency (Bitcoin and The Blockchain) and the potential it has to change traditional business models. A significant example happened last week, with ANZ and Westpac week announcing they had successfully used The Blockchain instead of paper for bank guarantees on a commercial property lease. In using Bitcoin and a Blockchain, there are efficiencies to be gained in property, making transactions faster, easier and safer, but it will remarkably change what we know now. Samantha McLean simply explains how Bitcoin and the Blockchain may impact the industry.
Currently, a real estate transaction involves going through many intermediaries, such as mortgage providers, solicitors, and others. Bitcoin and the Blockchain have the potential to completely change this process to make it faster, easier and safer.
What is Bitcoin?
Bitcoin is a digital currency that does not rely on a bank or central party to process and verify transactions. Instead, your transfers are encrypted and sent to a distributed computer network formed by Bitcoin users. No financial institution is involved in the process, and the currency is not backed by any physical assets. If you remember, Bitcoin was made famous for all the wrong reasons (i.e., drugs and illicit goods – until the FBI forced a shutdown in 2013). It is kind of hard to get over that ‘reputation’, but we’ve come a long way since those days. Bitcoin and other digital currencies such as Ripplecoin and Ethereum have significantly grown in market cap this year, largely due to volatility, uncertainty, and intervention in world currency markets.
What is The Blockchain?
The Blockchain is arguably known for enabling Bitcoin. Bitcoin, simply put is just a type of currency like the Australian Dollar or the English Pound. To be useful, it needs to be able to move from one person’s hands to another. So if you think of The Blockchain like a road or freeway, and Bitcoin just being a type of car — it makes it a bit easier to understand. But as far as the road analogy goes, The Blockchain can transport all kinds of assets, including different types of currencies and property that may need to travel from one owner to the next.
As it stands, The Blockchain is a public ledger which is both transparent and incredibly secure. Rather than storing information in a central repository, (like banks do), it is a distributed database spread across a very large computer network that each verifies the integrity of the decentralised database and its transactions. Third parties are not needed to keep any of the processes flowing because resources are shared.
Every transaction you complete today creates a set of data associated with it – for example, if you buy a car, artwork, shoes, there is unique information formed about that transaction which is considered a ‘block.’ This ‘block’ contains information like the price, who you bought it from, the purchase date, and the purchase agreement. In The Blockchain world, a record or ‘block’ is only added to the chain when each ‘block’ from other key users is identical. This means that once blocks are written, they cannot be altered by any one party to the transaction because it would not match the other blocks in the chain. For example, you can’t change the date of the purchase of your home because your alteration wouldn’t agree with say the sellers or the lenders “blocks” and would not be added to the chain.
What Do They Mean for the Real Estate Industry?
With the real estate industry currently relying heavily on traditional centralised financial institutions for mortgages and title deeds, this is likely to create significant change, but probably not overnight. By creating transparent and secure integrity and ownership in transactions, it means that some markets will be able to decentralise (think: taking out some of the intermediaries that increase costs and times to complete transactions).
Referring to Blockchain in an interview with us earlier in the year, Chief Inventor at realestate.com.au Nigel Dalton says, “It’s a great way of illustrating that you don’t suddenly need to have one very big central account with a true record in it. Everyone can have a copy of all the accounts, and it distributes very quickly across a high-speed internet. It’s not a legal tender, it’s not a promissory note of any kind. It is basically the title and the mortgage.”
For Real Estate Agents
In 2014, Forsyth Real Estate – one of the oldest real estate offices in Sydney – yet one of the most innovative, looked at introducing Bitcoin payments for its residential and commercial properties, as well as for rental payments as the agency deals with a number of overseas clients. They worked with a payment provider specialising in digital currency, to convert the bitcoins into Australian dollars. But despite global interest in their potential in being the first to do so they decided to shelve the idea due to concerns brought on by the Australian Taxation Office and the New South Wales Fair Trading department on tax matters.
PEXA have now brought Australia to a near paperless property market. But, for Blockchain property transactions to exist in Australia, every property would need to have a unique identifier (some land registry systems already have this); these would need to be transferred to a Blockchain, which would also need to contain definitions of who the stakeholders are in each transaction, for example, the owner, the buyer, and the lender. All of the information associated with the property can be stored on The Blockchain as part of the real estate process. This doesn’t mean that buying or selling would take place without agents, the transaction would just be a lot smarter and faster, speeding up contracts and payment times. Again, a quote from Nigel Dalton, “They’ve come a long way but they’re not there yet. The adoption by lawyers, because it threatens their role in the ecosystem, is lower than they’d anticipated and their change management’s higher than they anticipated. But they (PEXA) are very, very patient.”
The concept of “Trust Accounting” in rental payments would also like to change remarkably because Blockchain is unrelated to a bank, and is in itself a trusted system. (And just think: would this be the end of stamp duty charges as we know them?)
Consumers deal with a lot of intermediaries throughout the house purchasing process, mostly due to inaccessible information sources and an inability to record your own documentation. The blockchain can securely store and verify data such as the current legal owners of a property, the deed information and the repair history of the home (property managers, how cool would that be?)
Neither consumers nor agents would need to visit multiple physical offices to get all the information necessary to complete the home purchase process. Would anyone miss the additional costs such as title related costs, insurance, and legal fees, building inspection documentation and more would all be publicly available? Probably not. Plus, the transaction would take days to settle, not months.
What’s happening overseas?
Sweden was the first ‘Western’ country to seriously test The Blockchain for their land registry. Last year, they worked with company ChromaWay and have come up with a proof of concept on how the property market would work on The Blockchain.
The United States real estate industry is exploring several ways to incorporate Bitcoin usage and revamp inefficient processes. The Falcon Condominiums in Philadelphia, Pennsylvania offered the digital currency as a payment option to attract a tech-forward crowd for the new building. A New York real estate broker is also experimenting with accepting Bitcoin, as they don’t have to charge additional processing fees for these buyers, and they receive payment quickly. The BitPremier marketplace, supported by a New York City-based group, features properties for sale and lease with sale prices in Bitcoin, (along with cars, silver service items and other unusual stuff).
The United Kingdom is undergoing significant real estate shake-ups as a result of Brexit. Cai-Capital is one of the real estate pioneers in this country investigating ways to add Bitcoin to its accepted payments. The company operates in several international markets that favour digital currency, such as Brazil.
Bitcoin and The Blockchain have the potential to completely transform the way we do business in the real estate industry. Digital records that can easily be looked up and verified reduce the amount of time spent in the settlement process, as well as transaction speeds that are measured in minutes, not days. Watch this space.