Q: Our brokerage has been approached by a buyer who wants to use Bitcoin to purchase a single-family residence. In addition, a different seller has inquired whether we will advertise that seller will accept Bitcoin or other cryptocurrency on the sale of their property. How does this work and can we be involved in these types of transactions?
A: While it is possible for a buyer or seller to accept something of value other than cash for the purchase or sale of property, there are some issues and risks in trying to do so with Bitcoin or other cryptocurrencies.
BACKGROUND: Bitcoin is the first, most widely used, and most famous cryptocurrency. There are perhaps more than a dozen cryptocurrencies, all of which are based on “blockchain” technology; and more are being created with regularity.
Cryptocurrency is anonymous in the sense that the cryptocurrency is not tied to people, but rather to one or more specific keys or addresses known only to the owner. As a result, cryptocurrency owners are not identifiable, but all transactions are publicly available in the blockchain as a transfer from one unidentifiable address to another. Cryptocurrencies are bought and sold in exchanges; and, in some countries, exchanges are required by law to collect the personal information of their users. But that practice can be circumvented by using an unregulated exchange in a different country.
For more information, see the articles in Wikipedia on “Cryptocurrency” and “Blockchain.”
While Bitcoin (and other blockchain cryptocurrencies such as Ethereum, Litecoin, Monero and Zcash) could be used to purchase anything, including real estate, there are several cautions:
- Cryptocurrencies are often used for money-laundering, disguising the actual source of the funds.
- Until the cryptocurrency market settles down (and there is an argument that it eventually may do so), it is currently theWild West in which daily swings in value of 20% or more are considered “normal.”
PROBLEMS USING CRYPTOCURRENCY IN REAL ESTATE TRANSACTIONS: Here are some of the problems that are inherent in trying to structure a purchase/sale agreement using cryptocurrency:
- All financial amounts shown in the Purchase Agreement including, but not limited to, deposit and price must be in a US Dollar ($US) amount so that neither the seller or buyer is subject to swings in the value of the cryptocurrency during escrow.
- All of the buyer’s deposits that are put into escrow will have to be in $US because escrow companies will not accept cryptocurrency. Escrow companies are not willing to accept cryptocurrency for the balance of the down payment at the close either. This necessitates a transfer of the cryptocurrency from seller to buyer outside of escrow which is risky without any assistance from a neutral third party to oversee the transfer. For example, the purchase price must be paid before title is transferred, which is why we use escrow companies. But if the cryptocurrency is transferred outside of escrow, what guarantee is there that seller will then actually transfer title? Conversely, if title transfers first, what is the guarantee that buyer will transfer the cryptocurrency to seller? And, it is impossible to have both happen in the same instant.
- The vast majority of reputable lenders are not currently equipped to accept cryptocurrency as the buyer’s proof of funds for purposes of loan underwriting.
- Because cryptocurrency is, by definition, held under an anonymous electronic address, the method for the buyer to verify to seller sufficient funds to close escrow must be established using some other verification method that will satisfy the seller.
- Even though the Purchase Agreement and the Escrow Documents will necessarily need to specify $US, when the bitcoins are actually transferred, because of the volatility in the cryptocurrency markets, it may be extremely difficult to determine the actual value of the cryptocurrency at that moment in time, which may harm one or possibly both of the principals. From a practical standpoint, cryptocurrency is not really designed for use in real estate transactions where there is, of necessity, a time delay between contract ratification and closing. The question then is “Who, as between seller and buyer takes the risks of those swings?”
- Special language will be needed in the Purchase Agreement to deal with the value fluctuations and the other issues above. Sample language for dealing with buyers using “non-cash” as some or all of the consideration paid to buy real property is included below in this Tip. It is not a separate form and it is only intended to serve as a guide to brokers for how to try to handle this topic if the clients insist upon ignoring good brokerage advice.
PRACTICE TIPS:
- One question that should be posed to any sellers who want to accept this type of transaction is how can they verify that buyer has sufficient cryptocurrency to cover the purchase price when:
- The whole purpose of those currencies is the inability to prove who owns them; and,
- The currencies have wild up-and-down swings almost daily.
- In view of these difficulties, the best practice is to advise anyone who is willing to offer or accept any of the block-chain cryptocurrencies to think carefully about the risks and issues detailed above.
- Regardless of the willingness of the principals to use cryptocurrency in a real estate transaction, brokers should insist on good ole cash for commissions.
- TAX CONSIDERATIONS: The IRS considers cryptocurrency to be an investment and not a currency. It is thus subject to taxation. Real estate professionals should advise sellers and buyers in writing to consult with their tax advisor regarding any personal and real property tax consequences of using cryptocurrency prior to signing a Purchase Agreement to sell or buy real property.
Do not forward to Sellers or Buyers: This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2018 2/09/18
Contract Language for Use When Some or All of Buyer’s Consideration Consists of Cryptocurrency:
(Can be copy/pasted into an Addendum form)
The Parties understand, acknowledge and agree that Buyer shall be using a specified form of Cryptocurrency instead of money as part or all of the consideration for purchasing the Property. Broker and its Sales Associates have not made any representations or warranties as to the current or future value, use, ownership, transferability and/or state of title of the Cryptocurrency specified in the Purchase Agreement and which may be either transferred to the Seller by the Buyer at close of escrow. or sold by Buyer and converted to cash to be delivered to Seller.
The Parties should retain their own appropriate experts to satisfy any and all concerns that they may have regarding the use Cryptocurrency including, but not limited to: (a) their own qualified California real estate attorney regarding any and all legal issues that may impact the use of Cryptocurrency; and (b) their tax advisor regarding the impact of using Cryptocurrency on any and all taxes that the Parties may be required to pay.
The Parties should carefully and thoroughly investigate Cryptocurrency and independently satisfy themselves as to its value, use, ownership, transferability and/or state of title during the Purchase Agreement’s due diligence investigation contingency period. In the event that the Parties cannot agree as to the value, use, ownership, transferability and/or state of title of the Cryptocurrency during the investigation contingency period, then either Buyer or Seller may exercise this contingency and cancel this Agreement.
The Parties understand, acknowledge and agree that Broker and its Sales Associates do not have expertise in Cryptocurrencies and do not recommend using non-cash items in lieu of money.”