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Acccepting Cryptocurrency in real estate transactions can increase the probability of a sale. Use of Digital Assets around the world is approaching mass adoption and cross-border transactions in cryptocurrency are becoming more and more common. This is still a new concept for many real estate owners and this web page is designed to explain the process in simple terms.
Cryptocurrency is often referred to as “Digital Assets”. The most common digital asset is Bitcoin and all other cryptocurrencies are referred to as “Alternate” coins. The most well known “Alt Coin” is Ethereum. There are also “Stablecoins” that are pegged in value to the US Dollar or its equivalent. Stablecoins are the most commonly used digital asset in initial real estate transactions because of their lack of volatility. Bitcoin and Alt Coins on the other hand are not typically used in earnest money deposits because they are volatile and may vary in value during the months preceding the real estate closing. Once the closing date has been reach, Bitcoin or other Alt Coins may be used as the final payment because the value of those digital assets can be determined at the exact time and date of closing. This will be explained in more detail below.
Cryptocurrency is an asset accepted worldwide through a secure peer-to-peer blockchain network. Transactions are confirmed within minutes — 24 hours a day, seven days a week. Fees are minimal and all transactions are fully auditable for future reference.
Stablecoin Deposits – It is recommended that stablecoins like USDC or USDT be used for earnest money deposits in real estate because the value of stablecoins is pegged to US currency and is very stable. Moreover, transaction fees are minimal and all transfers are usually completed and confirmed within minutes on a 24/7 basis. By keeping the earnest money deposit in digital format, the full amount of the deposit can be refunded to the buyer quickly and efficiently if all sale conditions are not met. Or they can be held securely on deposit until date of closing. Because of their stable value, the full amount of the earnest money deposit (with minor adjustments) can then be applied to the final purchase amount needed at closing.
Earnest Money Deposit Example:
The Buyer in a cryptocurrency real estate transaction is most likely familiar with all types of digital assets. As such, a typical cryptocurrency buyer may have multiple cryptocurrency assets in multiple cryptocurrency accounts around the world. In the United States, for example, the buyer could have accounts in cryptocurrency exchanges like Coinbase or Kraken. If that were the case, the buyer would most likely have multiple assets in these accounts which could include:
As an alternative to a Cryptocurrency Exchange, a Buyer could also have all digital assets stored in an offline “Cold Wallet” for security purposes (described in more detail below). Regardless of where these digital assets are stored, each specific asset has a unique digital address which is recorded on the applicable blockchain.
Once an Offer to Purchase Real Estate has been prepared and the form of payment agreed upon, digital asset “Addresses” should be added to the agreement. In the example below or to the right, the $10,000 USDC earnest money deposit will be transferred from the Buyer’s USDC address to the Seller’s USDC address. The Seller’s USDC address may be owned by the real estate agent, attorney, or title company preparing the closing documents. At the time of closing, payment(s) can be sent directly to a crypto address owned by the Seller. As an alternative, all cryptocurrencies could be converted to local fiat currency and transferred to the Seller.
Section of “Purchase Offer Agreement”
The Seller in a cryptocurrency real estate transaction will most likely use a cryptocurrency account of the real estate broker, attorney, or title company responsible for the closing documents. It is the Seller, however, who makes all decisions on what type of payments are to be received and where the payments are to be transferred. One option for the seller is to receive digital asset payments — and then convert them immediately to local (fiat) currency. As stated above, however, it is generally more efficient to keep the initial payments in digital format. The final payment(s), however, can be made in several ways which are described further below.
When accepting Cryptocurrency for real estate transactions, there are different options for transferring the digital assets from the buyer to the seller’s sales representative.These include:
One option for transferring digital assets for real estate transactions is through a cryptocurrency exchange. This requires having an account at a mutually agreed upon cryptocurrency exchange which will act as the intermediary or temporary custodian of the digital assets. In the US, for example, Coinbase or Kraken could be used as the cryptocurrency exchange. At minimum, the real estate broker, closing attorney, or title company should have a cryptocurrency exchange account so that the buyer or buyer’s representative can transfer digital assets to that digital asset escrow account.
For reference, every cryptocurrency exchange has a specific “Address” for every every digital asset (coin) that the exchange offers for trade or transfer. If for example, USDC stablecoins are used for an earnest money deposit, an address for that digital asset is provided (a string of numbers, letters, and symbols) so that the sender can easily send the digital assets to be used for the deposit from the sender’s cold wallet or cryptocurrency exchange. Once a digital asset is received, it can then be transferred to another account or a “Cold Wallet” described further below.
“Peer-to-Peer” means transferring digital assets directly between two parties without using an intermediary or unrelated third party. A cold wallet is a small physical device that securely stores digital assets offline. It is secure because private keys (stored separately) are needed to access the device and the device is kept offline when not in use. This is done to prevent any hacking attempt that may occur if kept online unattended.
As stated above, the transfer process is “Peer-to-Peer” because it does not need a third party or intermediary agent such as a bank or cryptocurrency exchange. Thus, a transfer of funds can occur directly between the buyer and broker, which could include an escrow agent, title company, lawyer or owner. The fees for transferring funds are minimal and all transfers can be done within minutes, 24 hours a day and seven days a week. Currently, earnest money deposits (and final payments) are made by bank or wire transfers and occur only during normal business hours; this incurs expensive transfer fees and can take days for transfer verification. Once digital assets are received in a digital cold wallet, they can be stored for future use, sent to a cryptocurrency exchange for conversion to fiat (local) currency, or traded for another digital asset.
When receiving an earnest money deposit for real estate in the form of cryptocurrency (digital assets), it is up to the owner or owner’s representative to decide whether or not to keep digital assets in their current form — or convert them to local currency. Since Stablecoins are pegged to the US Dollar, they are generally retained as a digital asset until the closing of the real estate property. However, in the event conversion to local currency before the closing is desired, there are numerous options to consider.
When converting digital assets to a local currency, it is important for the receiver to have a banking institution that has an established relationship with a cryptocurrency exchange. If, for example, stablecoins are received in a cold wallet, those coins could then be easily transferred to a cryptocurrency exchange for conversion to US Dollars. Once that transaction is completed (usually in seconds) the US Dollars could then be sent by the Cryptocurrency Exchange to the bank registered to that account holder. But again, retaining digital assets in escrow is normally the preferred option for the earnest money deposit because it is easy to transfer funds back and forth. Final payment at the real estate closing can be retained as digital assets or converted to local currency based on the seller’s wishes.
At the time of closing a real estate transaction, when the final disbursements are made, the seller can decide the form of asset(s) to be received. In other words, the seller can decide on receiving cash, stablecoins, or cryptocurrency — or a combination of any of the above. The main point to understand is that the spot value of any cryptocurrency can be determined at any specific date and time. At the time of closing, then, the value of all digital assets can be determined and the balance of payments can be calculated and distributed accordingly.
If any digital assets are remaining in the escrow account at the time of closing, the seller has the option of receiving the assets directly into a digital cold wallet or sent to a cryptocurrency exchange. Once on the exchange, the assets can be stored for future use or exchanged in multiple transactions to meet the Seller’s needs and objectives. This would include the option converting all the digital assets to cash and transferring the total amount of cash to the bank account of the seller.
It is important to note that Cryptocurrency like any other asset has cycles in value. Therefore, it’s also important to be aware of where we currently are in the Bitcoin value cycle. Bitcoin is unique in that it’s protocol dictates that the reward for Bitcoin mining is cut in half approximately every four years. (Mining is the process of creating new “Blocks” in the Bitcoin blockchain infrastructure.) The halving policy was written into Bitcoin’s mining algorithm to counteract inflation by maintaining scarcity. Historically, the price of Bitcoin increases in value after each halving because the supply of Bitcoin is theoretically being reduced. The most recent Bitcoin halving occurred on 11 May 2020, when block 630,000 was mined. As a result of that halving, the block reward dropped to 6.25 BTC. The next Bitcoin halving is projected to occur in April of 2024. The chart below shows both the Bitcoin halving cycles and typical volatility both before and after each halving.
Using Cryptocurrency in Real Estate – As stated above, non-volatile Stablecoins are generally used for earnest money deposits for the purchase of real estate. Any cryptocurrency may be used, however, as long as volatility and timing is taken into consideration. Based on the projected Bitcoin halving occurring in 2024, it is a higher probability that Bitcoin or other alternate coins will be spent later in 2024 because of profit taking. Therefore, now is a good time for real estate sellers and their agents take the time to prepare for digital asset transactions in real estate.
If a volatile digit asset is considered for real estate payments, provisions should be made in the Offer to Purchase Agreement to account for volatility. The simplest procedure to be used in the Sale Agreement is summarized as follows:
Buyers and Sellers should seek tax advice and confirm that the value of the cryptocurrency should be determined at the time of closing. That value then becomes the official sale price to be used in all tax computations. In other words, the sale price on the date of closing becomes the basis for the new owner and the sale price minus the previous owner’s current basis represents the taxable income on the sale. This is similar to a normal local currency transaction.
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