What does the commercial real estate professional really need to know about cryptocurrency? Are there relationships between, on the one hand, 2017’s mania of speculators lining up to trade billions of dollars for bitcoin or other cryptocurrencies, and on the other hand, the existing commercial real estate market ecosystem?
Never Mind the Cryptocurrency, Here’s the Blockchain
The biggest financial technology news item of 2017 was about bitcoin, the first in a series of digital “currencies” called cryptocurrency that have been introduced by independent software engineers over the past ten years. As with any currency worth its name, the question of value is huge.
Why is any given currency valuable? In the case of the U.S. dollar, it’s because dollars are accepted for goods and services produced in the U.S., are accepted and preferred in a great number of other countries, and because U.S. taxes are paid exclusively in dollars. The dollar’s value is stabilized by a system of banking under the Federal Reserve that issues “just enough” dollars to avoid hyperinflation, or rapid and extreme loss of value.
|This article was originally published in the Winter 2018 issue of NAR’s Commercial Connections magazine|
Bitcoin and its fellow cryptocurrencies fly in the face of this arrangement. Where the U.S. dollar’s capacity to store value is managed by the quasi-governmental Federal Reserve, a cryptocurrency depends exclusively upon its underlying software and network to pass value between trading partners. Put another way, with cryptocurrency, there’s nobody in the “middle,” just software and the internet.
It’s that underlying software and network, as opposed to a currency built upon it such as bitcoin, that holds the most potential for changing the commercial real estate business. That software and network together is called blockchain. So what makes up the blockchain?
A digital currency, separated from a banking system, needs a method to ensure that when I hand you a coin, I can’t hand it again to a second person. That’s what blockchain is. Every transaction undertaken with a given cryptocurrency is recorded, irrevocably, into a giant public ledger that everyone can see, thanks to the internet. This chain of transactions and motions is encoded into blocks of data, chained together in time. The validity of the information in the ledger is “guaranteed” by the “crypto” part of cryptocurrency, which we won’t get into here.
Blockchain of Title?
It’s here we should take notice that blockchain’s public ledger of transactions has a description that somewhat matches with a key real estate institution: the title deeds to commercial properties. Chains of title reflect historical transactions attached to a given property, as recorded in county offices. It’s this surface similarity between title chain and blockchain that has inspired proposals in the real estate industry to adopt blockchain in the areas of title recording and land registry.
Unsurprisingly, these proposals are numerous. Dave Conroy, R&D engineer for NAR’s Center for REALTOR® Technology and CRT Labs, watches the space and thinks that diversity of approaches is key. “Whether it is accuracy, accessibility, or transparency, improving property data is a key use case for blockchain and one that we will see being tackled first. I am aware of multiple pilots kicking off early 2018 in the public and private sector that are looking at improving land registry and title recording using blockchains. What has me confident that this process will eventually be improved by this technology is the number of different approaches… teams are taking to tackle this prized challenge.”
Solution in Search of a Problem?
As an industry, title recording is not a hotbed of technological innovation. One reason is low volume: The number of recordings is modest compared to other types of legal or financial recordings that may number into the thousands processed per minute. Securities exchanges, for example, necessarily require deep computerization and strong data networking, and new software and hardware products and services are created every day intending to chase down and eliminate inefficiencies in these markets. By comparison, the average county recorder’s office (or equivalent) handles thousands of transactions in days and weeks, not minutes—there’s only so many pieces of property on the ground to work with. Can blockchain make a difference?
Michael Hoadley, CCIM, PMP, suggests the idea of blockchain replacing deed recording as something of a solution in search of a problem. “There’s a little bit of ‘it ain’t really broke.’” Hoadley suggests that anyone buying land in volume rarely attends closings themselves, leaving many details to attorneys and title insurance companies:
“While there are clearly inefficiencies, the lenders driving the need for title insurance are the ones to convince that blockchain title, for instance, would be an adequate substitute for an actual title policy.”
Follow the Money
Over the past ten years, blockchain technology has sought its place in the global financial ecosystem. Thus far, we know it’s good for one thing: creating a speculative rush, skyrocketing values of new quasi-currencies, and hundreds of billions in market capitalization. But for areas of commercial life that are more about terra firma than blue sky, blockchain thus far is an innovation without a station in life.