Part One: Sellers & Brokers are Finding an Edge With Bitcoin
Sellers are Paving the Way With Bitcoin
In 2015, a mega-rich property buyer had an odd request: he wanted to buy a home using Bitcoin (you can find out more information over at broker.cex.io). Not cash, but the digital cryptocurrency known as Bitcoin. It was an odd-enough request for the time but today, it’s a concept that’s slowly gaining favor all over the world. Here in the United States, however, Bitcoin for real estate is undergoing a long, slow slog to mainstream acceptance. But we’re here to change that. You’re about to learn how not just Bitcoin but the technology behind it – blockchain – is slowly disrupting the world of real estate here in the U.S.
We’re already seeing that sellers are increasingly accepting Bitcoin to gain an edge over competitors. What they’ve learned is that more and more buyers are looking to use their Bitcoins. In 2017, the first single-family home was bought using Bitcoin. Before that, a groundbreaking Lake Tahoe property deal worth over $1.5 million took place using Bitcoin. Michelle Mone, famous for her line of lingerie (Ultimo), is a big player in international property development and she is now involved in a development in Dubai offered in Bitcoin.
As the list grows, we’ll start to see real estate pros warming up to the idea of working with Bitcoin. As they open their eyes to the benefits of using blockchain-enabled technology, they’ll begin to see that Bitcoin payments are only the beginning.
Real Estate Pros are Starting to Jump on the Bandwagon
In order to gain an advantage over competitors, more brokers and agents are learning how to facilitate Bitcoin transactions. And once they learn about Blockchain’s massive potential in real estate, they envision a wide range of benefits coming their way as a result of streamlined processes. That could happen sooner rather than later because of a confluence of events taking place right now:
The changing demographics of the real estate market means more Millenials, who are more open to innovation
Recent advances in technology mean blockchain is quickly becoming mainstream
The public is slowly warming to cryptocurrency as it migrates from the realm of first adopters. Major retailers like overstock.com now accept Bitcoin
Bitcoin is the Wedge but Blockchain is Where the Promise Lies
By now, everyone has at least a passing knowledge of Bitcoin, the world’s first and most famous cryptocurrency. As Bitcoin wedges its way into mainstream consciousness, it paves the way for acceptance of other blockchain-based technologies like the ones we’re talking about here, in the world of real estate.
Not sure you’re quite getting this? Part Two will explain but basically, Bitcoin is only the start of what we can use blockchain technology for (it’s not just for payments!). We could build an entire real estate application on top of the Bitcoin blockchain, forever changing the way property changes hands.
Part Two: A Mini-Tutorial on Blockchain for Anyone Involved in Real Estate
If you’re already familiar with the nuts and bolts of blockchain technology, you can skip ahead to Part Three, where we talk about Blockchain’s troublesome reputation. Or you can skip ahead to Part Five, where we talk about ways blockchain is being used in the real world for real estate transactions.
Something This Important Needs to be Demystified
Since blockchain may be about to disrupt almost every facet of modern living, including real estate, isn’t it high time we all understood what it means?
If you’ve tried to understand blockchain before, you’ve probably read that it’s a ‘decentralized ledger that uses the latest in cryptography’. This a definition that does little more than leave most real estate professionals scratching their heads. It also fails to capture the enormity of the implications this new technology has for the future or our industry.
Let’s Start With Something You Know: Bitcoin
The best way to understand blockchain is to look at its first and most famous application: Bitcoin. Bitcoin was created when people wanted a new financial system that existed apart from the traditional banking system. What they were after was a peer-to-peer (P2P) exchange for the transfer of money.
What we’re after is a P2P exchange for the transfer of property.
Before Bitcoin, you had to go through a third party to safely exchange funds. Whether it was a bank or a credit card company, you needed that third element to verify transactions and to authenticate the sender and the receiver of the money. You needed the government, too, for the authentication part, which came in the form of government-issued ID’s, which are required to open a bank account or apply for a credit card.
Then along came Bitcoin which allowed people to eliminate that third-party and to safely and securely send payments without needing to go through a centralized institution like a bank.
Now, imagine what this could mean for real estate.
Blockchain is the Software Infrastructure Supporting Bitcoin
The technology underpinning the entire Bitcoin ecosystem is called Blockchain. And when people talk about Blockchain, they’re basically describing a huge database. It’s different from the databases of yesteryear because a blockchain database allows for totally validated entries that can’t be changed or hacked and which will never be duplicated by mistake.
Note that once an entry is made in a blockchain database, all those who are members of that particular blockchain network will instantly know about it. Blockchains are always up-to-date, no matter where or how you’re accessing the system.
In this line of business, that’s huge.
Think of each event that takes place in your average real estate transaction as an entry on the blockchain. The bids, the counter-bids, the acceptance of the offer, the signing of the deed… each event is time-stamped and recorded into the blockchain database as it happens. Entries are validated and secure. There’s no mistaking exactly where you are in the process.
The deed is signed over to the buyer and the property is conveyed and in the same moment, it can be recorded on public record. No time gaps. No room for fraudulent sellers to re-sell the property before the sale is made known.
It’s hard to overestimate the importance of having safe, reliable data in our industry but we’re hardly alone in that respect.
What good is a healthcare database if your doctor isn’t convinced your records are up to date?
How effective is law enforcement when the data they use to catch criminals isn’t kept safe from hacking?
How can digital data be used in our courtrooms if judges can’t trust it hasn’t been tampered with?
And last but not least, how fraud-proof is a home sale if nobody can prove it really took place?
Blockchain changes the world because it makes data safe from hacking. It’s always current and never outdated.
Part Three: Talking to Brokers & Realtors About Bitcoin & Blockchain
Whether you’re a seller, a buyer or a real estate professional, transferring property using a blockchain is a pioneering move. You’ll undoubtedly run up against more than a few raised eyebrows because, at this point, hardly anyone knows about or understands the technology. Plus, you’ve got the tarnished reputation of Bitcoin spoiling the whole show. Here’s how to combat negative stereotypes, doubt, and ignorance about Bitcoin and Blockchain.
Warning: Bitcoin’s Bad Reputation Will be an Obstacle in This Industry
As a blockchain ambassador for the Real Estate industry, you’ll need to know what you’re up against. You’ll meet resistance, not the least of which will stem from the bad reputation Bitcoin has earned for itself so far. We’re not talking about Bitcoin as an investment (yes, it’s volatile). We’re talking about the early adopters of this cryptocurrency and the splash they made in the news with their illegal activities.
Remember the Silk Road?
The Silk Road was an online black market based on the Bitcoin blockchain. It’s where one could go to purchase any number of illegal commodities and services, some of which are unspeakable and highly unethical. We’re talking human trafficking here.
Because a blockchain makes anonymity (sort of) possible, it’s popular with people conducting illegal financial transactions. Bitcoin, the original cryptocurrency, provided everything the online underworld needed in a payment system. The Silk Road sprung up for all kinds of nefarious activity ranging from gun sales and drug sales to human trafficking and more.
Then there’s the fact that several major data hijackers over the past decade or so have asked for ransom payments in Bitcoin. In fact, many analysts see a causal relationship between the invention of Bitcoin and the subsequent explosion in ransomware attacks.
So yes, Bitcoin has a bad name… and so does blockchain technology right along with it. Aside from the complexity of it all, this might be your biggest obstacle when it comes to getting skeptical colleagues, friends, or family on board. They just can’t get around the bad branding and can’t imagine it as a mainstream payment system.
But they’re wrong.
Let’s Bust the Myth: Blockchain Was Not Designed for Illegal Transactions
Criminals and anarchists love anonymity so they love Bitcoin. However, Bitcoin isn’t even anonymous in the first place! The entity that invented blockchain didn’t ever mean for it to be used anonymously. Most blockchains don’t even allow for anonymous users. Bitcoin’s official website states clearly in their Things You Need to Know section that Bitcoin is not anonymous.
How to Get Colleagues Past the Problem of Bitcoin’s Bad Rap
Education is the key to evolution and if we’re going to bring this industry into the 21st century, we’d better get used to explaining blockchain to colleagues, clients, and more. You’ll need to do more than reassure people that Bitcoin (and Blockchain) are for everyone, not just criminals. Here’s a quick guide to the lingo and the basic concepts of blockchain technology.
After this section (which, by the way, you can skip if you’re already knowledgeable about blockchains), we’ll dive right into some industry-specific uses for blockchain and some real-life examples of how leaders in the industry are already leveraging this exciting technology.
Part Four: Some Technical Jargon You’ll Need
Going Deeper: What Makes Blockchain Great for Real Estate?
How can data be so reliable? How can a database be so bulletproof, especially these days, when even the big companies like Equifax, Verizon, and the RNC can’t keep their own data secure?
The key lies partly in the fact that blockchain uses a “distributed ledger”. If you want to take another step down the rabbit hole, here’s why a distributed ledger works, and why there’s so much potential for its usefulness in our industry.
Let’s break it all down, shall we? A distributed ledger is…
‘Distributed’ means a blockchain database runs on millions of computers. Imagine an enormous spreadsheet that’s housed, in bits, on a global network of computers. Each node is updated when a transaction takes place so the spreadsheet is always updated. That means no transaction can be duplicated because once it has been entered into the blockchain, every computer in the chain knows about it. It also means there’s no centralization of power and no single point of failure.
It’s also open source, meaning anyone can make entries and anyone can view activity. That’s a big improvement over the siloed entities that currently play a role in every typical real estate transaction. It’s also a great leap forward from the privately-held data phenomenon that we deal with in this industry. Sometimes data miners aggregate property data that we’ve created and then sell it right back to us! Finally, for the purpose of reducing fraud, it’s also key to have a public record of all property transactions.
Once an entry has been validated, it’s virtually impossible to change it. Therefore, blockchain allows for permanent entries that can be trusted as original and unaltered. This is because it takes so much computing power to make an alteration it’s beyond the scope of reason to do so. Your electricity bill would be outrageous – making it completely not worthwhile to even attempt making a change. This built-in security feature is called Proof of Work (POW). Data on a blockchain is also encrypted, which creates another essential anti-hacking measure.
Why is so much power needed? The algorithm that validates each transaction takes incredible computational power because it’s so incredibly complex. Computational power translates into lots of electrical power needed. Again, this is called Proof of Work.
Each transaction is cryptographically signed, which ensures the person who is making the transaction is authorized to do so.
By the way, in case you’re wondering about the “block” in “blockchain”, it refers to the batches of transactions that get reconciled at regular intervals. Each batch is a block and they get all lined up in order of processing. Imagine a train where every car is a batch of transactions. Link them all and you’ve got a visual representation of a blockchain.
Outside of making cryptocurrencies possible, how can blockchain technology change things for realtors, brokers, sellers, and buyers?
Part Five: How Blockchain Will Change Real Estate
Blockchain technology has already begun to disrupt other industries. Deloitte cites a surprisingly long list of instances where Smart Contracts are gaining favor. These range from financial services (e.g. insurance claim processing) to health care (tracking personal health). But blockchain in real estate? Not even mentioned yet. But the implications are exciting and we’re on the cusp of something truly exciting if you think about all the ways this technology can change this industry.
To begin with, there are a lot of problems with the current state of affairs in the ways property changes hands.
Some Real Estate Problems That Blockchain Could Solve
Anyone who’s ever been part of a real estate transaction in the United States knows that the entire system could use an overhaul. It’s…
There are too many parties involved
Each uses their own proprietary software systems.
These systems are often badly outdated legacy systems that need to be replaced
Lacking in capabilities. None of these legacy systems talk to the others
Data is not shared. That results in incomplete property data as well as inefficient processes.
Nor is the data secure. Data breaches happen all the time, exposing buyers, sellers, and brokers to huge risks.
Assets are difficult to liquidate when they’re held in fiat currencies. Bitcoin is quick and easy to transfer.
Open to fraud. During the time gap between conveyance and recording, fraud can take place.
How Blockchain Could Iron Things Out and Bring it All Together
Using the Bitcoin blockchain as an end-to-end solution for transferring property solves all the common pain points in the real estate world. Conveyance and recording happen simultaneously. Ownership is transferred automatically and instantly gets entered into the public record on the Bitcoin blockchain. The entire process is transparent, immutable, easy, secure, and fast.
Already, in the State of Delaware, things are moving forward. In 2016, that state became the first state to implement blockchain technology for public records. The Delaware Blockchain Initiative began with a Public Archives project and is now moving much of the state’s regulatory environment to a distributed ledger system on a blockchain.
Possible Impacts on the Real Estate Industry
It’s easy to imagine that Blockchain may someday eliminate or drastically change the role of title insurance companies and lawyers in real estate. When the elements of a property sale such as title and payments are secured and authorized by the integrity of blockchain technology, is there still a role for title insurers and attorneys?
As for brokers and agents, their future roles in a blockchain ecosystem are less clear. Buyers and sellers alike will always need advice and guidance. Even if these real estate professionals serve only as a starting point for property sales, there’s still a role to play.
But no matter what, we can say with conviction that the main impact on this industry will be to speed things up, reduce complication, and improve recordkeeping… those are benefits everyone can appreciate, no matter what roles they’re playing in this environment.
Part Six: Real-World Applications of Blockchain in Real Estate
The IBREA Pilot Program
The International Bitcoin Real Estate Association (IBREA) ran a Pilot Program designed to prove that blockchain-enabled transfers of title could be successful. Like many experiments, it started with a set of questions and then set out to answer them. They posed the following common real estate blockchain questions:
Can you use a bitcoin blockchain to legally transfer ownership of real estate?
Is it possible to record a title transfer in government public records?
Do you need special permission or a partnership with the county government to do so?
They set up a purchase of some property in Chicago and created a token that stood for the property with the help of velox.RE. The result was a paperless conveyance that was legally and successfully recorded in the Cook County Recorder of Deeds. The final piece of the puzzle is to coordinate the transaction with a digital wallet to keep everything more secure.
Here’s the official list of accomplishments achieved by the pilot program:
Created a scarce digital asset token that’s nearly impossible to counterfeit
Transmitted the asset to someone else (conveyance)
Established a digital ledger to record it all
The Bitcoin is the Deed: Colored Coins
In this pilot program, the Bitcoin token serves as the deed. In order to transfer the deed, instead of a paper deed that gets transferred, the token is sent. It’s now a digital deed. In blockchain jargon, there are “colored coins”. These are Bitcoins that have the deed “printed” right on them (well actually, it’s ‘metadata’ or digital information that’s attached to the Bitcoin). So the colored coin functions as the deed.
While originally designed to be a currency, Bitcoin supports a limited scripting language that can be used to store metadata on the blockchain. Colored Coins is a concept that allows attaching metadata to Bitcoin transactions and leveraging the Bitcoin infrastructure for issuing and trading immutable digital assets that can represent real-world value. The value of such digital assets is tied to a real-world promise by the asset issuers that they are willing to redeem those digital tokens for something of value in the real world.
~Colored Coins Github
Part Seven: A Quick Reference Sheet for Blockchain in Real Estate
If a handy cheat sheet would be useful to you in your quest to learn about Bitcoin and blockchain in real estate, here you go. Share it with friends, family, or colleagues or keep it handy for yourself.
The Benefits of Using Bitcoin to Purchase Your Property
Fraud Protection. If there’s one phrase that strikes fear and panic into the hearts of anyone involved in real estate, it’s mortgage fraud. As IBREA founder Ragnar Lifthrasir revealed in the Cook County BLockchain Pilot Program, county clerk’s offices don’t guarantee a thing when it comes to recording legal documents. Even if a property is bought and the deed is registered with them, they can’t prevent the seller from immediately going out and selling that very same property to someone else, who can also register their deed.
Here’s the disclaimer from the Cook County Recorder of Deeds website:
Even though the deed was conveyed to you when you purchased the home, and was likely warranted to be free and clear of outstanding liens or claims at that time, there is nothing to prevent a scammer from filing a false claim on top of your legitimate deed after closing and finalization of the conveyance.
This is because County Recorders are not authorized by law to verify the legal claims made in documents.
When everything occurs in a blockchain environment, things move faster. Contracts can be completed quickly. Escrow is handled instantly. Due diligence is a breeze. Property records are instantly available to everyone who needs them. Monies are distributed in microseconds. There may not even be a need for title insurance in the future.
Blockchains are immutable so there’s no question when it comes to all the data surrounding your real estate transaction. All the key players are privy to the same information in real time.
Cost Effectiveness. Without the need for title companies (or perhaps even attorneys), buyers can cut down significantly on the cost of purchasing a property.
The Pros Benefits of Using Bitcoin to Sell Your Property
Attract a Wider Pool of Buyers. Although US-based buyers have been slow to adopt Bitcoin purchases in Real Estate, international buyers are a lot more comfortable using cryptocurrency. Reasons vary but the fact that Bitcoin is a global currency has a lot to do with it. One of the major hassles of international sales is the transfer of funds and using Bitcoin erases most of the problems in that regard.
Attract Buyers Who Want to Use Their Bitcoin. There are a lot of wealthy buyers who were invested in Bitcoin from the start. They’re Bitcoin rich but may not have had much of a chance to become materially rich. Buying property with their digital assets allows them to diversify their holdings switching out Bitcoin for property.
Speed & Accuracy. The same benefits the buyers enjoy make sense for sellers, too.
Real Estate Pros: How to Find the Right Blockchain for Your Application
If you own an agency, you might be thinking of setting up your own blockchain-enabled real estate platform. While shopping around for a software developer, Ragnar Lifthrasir suggests keeping these pointers in mind.
Choose public over private. A public blockchain is better than a private one for checks and balances.
Know the capabilities. Find a blockchain that can create tokens and handle money.
Opt for maximum security. Proof of Work (POW) is proven technology and until Proof of Stake is proven, stick with POW.
Research the governance. 95% of blockchains are not truly decentralized. They are controlled by just a few people so don’t make assumptions when you’re shopping around.
Think of your clients. You have high-value assets with very conservative people so the blockchain you choose must be stable and have a proven track record.