Would you accept a commission payment in digital currency? It’s a question being asked of commercial real estate brokers more and more. The growing popularity of cryptocurrencies like Bitcoin and Ethereum has transactions of all types considering a new payment paradigm.
New York City-based Bapple Realty was the first commercial brokerage to pay commissions in crypto after finalizing a deal in Manhattan’s pricy SoHo neighborhood. Using data on the Zap platform, the seller paid $3,400 in Ethereum tokens, split automatically to the broker and agents involved. Bapple Realty board member Nick Spanos co-founded Zap, a blockchain-based platform that executes smart contracts allowing seamless splitting and payment of a commission.
“These transactions are now automated, preventing human error and disputes in the process,” Spanos said. “Agents can now use a smart contract to choose how to get their commission paid, whether in cash, bitcoin, or ethereum. It’s one small step for blockchain, and a huge leap for the entire real estate industry.”
Smart contracts and commission payments are just a couple of the inroads crypto is making into the real estate sector, but crypto still faces major obstacles to wide-scale adoption. Mortgage lenders, brokers, and agents are still reluctant to accept crypto deposits for buying and selling property. Paying for a property in crypto requires a seller who’s willing to take it, a lawyer who can accept fees in crypto, and a title insurance company that’s willing to underwrite the sale. Many banks and creditors have strict policies banning members from making or accepting transactions using cryptocurrencies. Because every transaction is encrypted, crypto payments create serious trust issues that many financial institutions are not comfortable with. Crypto payments are the currency of choice for fraudsters and hackers, made worse because crypto transactions that have gone awry offer no recourse. More risk is involved in large crypto payments because they’re not reversible. If a hacker is able to swap a public address, they can divert the non-reversible payment to their own wallet. To limit risk, large amounts paid in crypto have to be sent in smaller portions. In essence, losing your digital wallet means losing everything inside.
Many states have passed legislation declaring crypto as a commodity or digital property, which means users must pay capital gains tax when a property is bought with a cryptocurrency. The IRS recently changed its 1040 tax form to add a question about digital currencies just below the taxpayer name and address box on the front page. It asks filers if “at any time during 2020, did you sell, receive, send, exchange or otherwise acquire any financial interest in any virtual currency?” Cryptocurrency is having a hard time functioning as currency because the IRS says they are property meaning that every transfer can trigger taxable gains, even buying a cup of coffee. The larger the payment, the higher the capital gains, the more tax liability, increasing transaction costs. Pricing in the added cost to the deal isn’t easy.
The messy guidance around capital gains is made all the more complicated by cryptocurrencies volatility. Crypto exchanges fluctuate often, sometimes several times a day. Because no physical assets back cryptocurrencies, valuation is inherently speculation. With no central control over the currency, anticipating volatility is that much more difficult. Volatility can cause the valuation of a transaction to change dramatically, which is a major problem in real estate transactions, where deals take weeks, often months. Crypto creates unique problems for escrow agents if volatility spikes one direction or the other while a deal is being finalized. The advantage of crypto is with the right escrow agent and established digital wallets, and the transactions can process the next business day, rather than the typical 30 to 90 days.
The obstacles haven’t stopped early adopters from forging the way. Pricey estates like one in Beverly Hills listed at $65 million are being priced in Bitcoin. On the commercial side, Magnum Real Estate Group is selling three retail condos in Manhattan’s upper east side for $29 million and will only accept payment in Bitcoin. A Los-Angeles based landlord has begun accepting rental payments in crypto. If crypto were ever to hit wide-scale popularity, it would create even more issues considering the Bitcoin network can only process seven thousand transactions per second. Visa alone can handle 24,000 transactions per second. Advancements in processing known as The Lighting Network are working to overcome issues of scale.
“There’s a demand for real estate and there’s nothing being offered to the holders of crypto,” Ben Shaoul, managing partner of Magnum Real Estate Group, told Yahoo Finance. “Our idea is to offer something that’s unique and try to pair the holders of crypto with those who want to sell real estate.”
Whether receiving a commission, rent, or other payments through cryptocurrencies, the conservative nature of the real estate sector is not rushing to adopt new financial methodologies. Crypto transactions of all kinds suffer from extreme volatility, high transaction costs, and a large carbon footprint. From a regulatory perspective, crypto is caught between an asset and a currency, getting the toughest scrutiny from both directions. Nothing about crypto is as easy as using cash. Making real estate deals with crypto is technically possible but best done carefully alongside professionals who keep up-to-date with the rapid pace of developments impacting virtual currencies.