Though still a mystery to many U.S. consumers, Bitcoin (and other forms of cryptocurrency) is used more and more in everyday transactions. Accordingly, cryptocurrency is projected to quickly become a mainstream form of payment—including in connection with real estate transactions. Bitcoin remains unregulated and unrecognized as an official U.S. currency. Nonetheless, Bitcoin is subject to taxable appreciation once converted to dollars, much like stocks. As a result, real estate lawyers should have a keen understanding of the issues of cryptocurrency functionality when structuring Bitcoin-inclusive transactions.
It is important to understand Bitcoin and how it works. Bitcoin is a form of digital currency involving blockchain technology—a digitized and public ledger of all Bitcoin transactions stored in the cloud. Bitcoin can be purchased from bitcoin exchanges, and can be stored in a digital wallet. These wallets are virtual bank accounts containing public and private keys. The public key represents the equivalent of a bank account number and the private key represents the equivalent of an ATM pin. Notably, although the blockchain records all Bitcoin transactions, the transactions themselves remain anonymous with only the identification of the digital wallet being recorded. At Bitcoin ATMs, keys are printed and, just like cash, if that print-out is lost, so is the Bitcoin.
At the Closing Table
Unregulated and uninsured, Bitcoin remains highly susceptible to hacking and theft—a reality that keeps the digital currency firmly planted in its mysterious persona. However, as more and more purchasers seek to purchase property using cryptocurrency (and title companies are willing to accept the risks tied to the volatile nature of digital currency), real estate lawyers will, in equal frequency, be tasked with explaining the foregoing characteristics of digital currency to sellers, and describing what these transactions will look like at the closing table.
In taking these efforts as counsel, it is imperative to highlight to sellers of real property that (1) if sellers do not want to assume the risks that emerge when accepting Bitcoin as direct payment, they may turn down purchasers who wish to use their Bitcoin as cash, and (2) if title companies accept Bitcoin from purchasers, sellers walk away from the closing table with U.S. dollars, not Bitcoin print-outs, thus eliminating the risks of accepting direct Bitcoin payment. Title companies may accept Bitcoin from purchasers at closing, and then convert and furnish the converted cash to sellers in satisfaction of the purchase price. In doing so, sellers will not assume any of the risk fluctuating Bitcoin values; they will walk away from closings with U.S. dollars of fixed value. The same conversion should occur in connection with down-payments or deposits; as such amounts are contractually fixed and should not be in a state of daily fluctuation. While the process sounds complicated and laborious, the task of converting digital currency to U.S. dollars at the closing table has been characterized as both expedient and simple.
In September 2017, Kuper Sotheby’s International Realty brokered what is being called a landmark residential sale in Austin, Texas—a sale completely financed in Bitcoin. While the use of cryptocurrency in such a transaction would be expected to present a multitude of complications, the brokerage expressed shock by just how simple the process turned out to be, citing that it took all of ten minutes for the Bitcoin to be changed to U.S. dollars and close the transaction. Thus, the use of Bitcoin may actually quicken the pace of real estate transactions, as wallets are instantly verifiable via public ledgers contained in blockchain technology, thereby representing a simplified method for remitting funds and closing deals.
Dealing With Devaluation
In transactions that are only partially funded with Bitcoin in conjunction with mortgage financing, however, both purchasers and sellers should be counseled on the need to exhibit available funds that absorb the risks of significant Bitcoin devaluations—that is, purchasers should have sufficient funds to account for devaluations in a purchaser’s Bitcoin between contract signing and the date of closing, as lenders will not make up the difference between their commitments and any subsequent devaluations. For example, say Person 1 is interested in purchasing a parcel of real property from Person 2, and, as of that date, possesses enough Bitcoin to finance half of the purchase price of that property. Between the time that Person 1 signs a contract of sale and attends the closing, her Bitcoin may decrease in value such that only one-third of the purchase price is Bitcoin financeable by the closing date. If Person 1’s lender has only committed to lending an amount equal to one-half of the purchase price, Person 1 will either (1) need to secure another source of immediately available funds, or (2) back out of the deal altogether. To avoid the collapse of a sale, sellers can either request production of proof of sufficient funds from purchasers prior to contracting, or contractually provide that such deficiency during the contracting period shall constitute a termination right for the seller.
It is thus imperative for both Person 1 and Person 2 on either side of the transaction to contemplate realities of decreasing Bitcoin values during the contracting stage, and thereby determine the total amount of available funds that will be required to ensure Person 1 is able to close with all necessary funds by the closing date. This can require more complicated drafting in mortgage contingency clauses, with alternate financial realities set out in parallel with the manner that those realities may transpire in the volatile world of cryptocurrency.
As cryptocurrency becomes increasingly prevalent in consumer markets as an alternative to the schema of central banking, the emerging generation of real estate purchasers is projected to include a sizable market of digital currency spenders. In light of this predicted financial future, real estate lawyers should be prepared to explain the mechanics of cryptocurrency to their clients and contemplate various constructions of financing to account for the risks inherent in assets with values of limited predictability.