We live in the age of technology and change, where our cars park themselves and talk of the colonization of Mars has become commonplace. So, while nearly every industry has undergone an unprecedented facelift thanks to the disruptors of Silicon Valley, it’s surprising that our financial system has remain relatively unchanged for centuries.

Yes, we are able to pay bills and transfer funds for goods and services on the internet, but the way that we rely on centralized financial institutions as the keepers of the keys has gone unchallenged since the creation of banks in 1791. That is, until now.

In 2009 Cryptocurrency was introduced in the form of Bitcoin. The key angle was the decentralized control of currency and has only increased in popularity since then. You may have heard of it; but, along with many other individuals, after learning of it, you might be left with more questions than answers.

And as a business owner in particular, you might be wondering what kind of impact this technology will have on the real estate market, and ultimately your own business. Read on for a crash course in crypto along with an interpretation of its current role in real estate.

The Basics

What is Cryptocurrency and Why Does it Exist?

Cryptocurrency is true digital payment. It exists only online in virtual form as a means to provide a hyper-secure way to transfer funds. It uses cryptography to conceal the sensitive data associated with each transaction and, as such, maintains a high-level of protection against hackers and fraud.

There are many different forms of Cryptocurrency. Bitcoin might be the one you have heard before but there are many others. Popular projects include Litecoin, Ripple, Ethereum, Stellar, and more.

The reason for the creation of such technology is complex, but there are four major themes: decentralized control, record-keeping via blockchain, built-in scarcity, and user anonymity.

How it Works

To illustrate how Cryptocurrency works, let’s use it in an example.

Say Jennifer wants to buy a mature bonsai tree from Zach using Bitcoin. Jennifer will start the process by logging into her own Bitcoin wallet with a private key. The key is a long string of letters and numbers unique to her account.

At this point in a normal, non-crypto transaction, Jennifer would essentially be sending a message to her bank about her intent to transfer funds, who would then communicate with another bank and ultimately to Zach’s account to complete the action.

However, in this scenario, there is no middle man. The transaction is direct, immediate, and shared with the entire Bitcoin community. This is what it means to be decentralized. The record of Jennifer’s transaction is added to a running docket of transactions, known as a block. Every 10 minutes, a new block, or batch of transactions, is added to the chain.

Without the oversight or governance of banks, Bitcoin employs competition to verify each block. A subset of their network races to solve a complex math problem, with the winning earning Bitcoin and named the official record of note. This process, known as mining, ensures that no one entity can monopolize the Bitcoin market.

And while the mechanics behind the scenes are radically different from the way it’s always been done, at the end of the day it doesn’t feel that different to Zach and Jennifer, happy with their quick and easy Bitcoin for bonsai exchange.

Who Are the Users?

While we as Americans like to consider ourselves on the cutting edge of technology, when it comes to countries using Cryptocurrency, we aren’t even in the top 10. Surprisingly, usage of Bitcoin is gaining popularity in parts of the world considered economically unstable, including areas in South America and Africa.

There are close to 44 million blockchain wallet users worldwide, with over half of them joining the wave within the past couple years, after 2018. And even if you don’t necessarily know anyone in the game just yet, a recent study by the London Block Exchange shows that 28% of millennials not currently invested are at least considering it.

Cryptocurrency in Real Estate

The Impact on Investment

In the past, the selling and purchase of real estate has typically been an in-person type of business. However, crypto is flipping the script on everything from commercial to residential. What’s more, some realtors, particularly in developing countries, have even taken to blockchain to record their deeds, taking advantage of the irrefutable nature of the system. For this reason and more, the use of cryptocurrency in real estate has already had a significant impact.

1 – Tokenized

One of the biggest disruptions to real estate investment comes in the form of a process known as tokenization. Alphapoint defines it as “the process of creating a digital asset that represents a single property or a portfolio of properties on a blockchain-based system.”. In other words, imagine turning your house into a big digital pie. As the owner, you can sell off pieces of that pie to investors. Because the entity has been broken down into smaller pieces, it becomes more affordable for a wider range of investors.

A recent and high-profile example of tokenization can be found in the case of the St.Regis Aspen Resort. Digital asset management firm, Elevated Returns recently sold off 18.9% of their client’s ownership in the form of digital tokens to the tune of roughly $18 million. Because, through the tokenization, buy-in was much lower than traditionally expected for these properties, around $10,000 a unit, investors had the opportunity to obtain a small ownership stake in a business valued over $95 million.

2 – Fast

More than anything, cryptocurrency ups the ante on speed. Cutting out the middleman means no time needed for traditional processing. Users are guaranteed to have their money in their accounts accessible in just 10 minutes. And without the intermediaries, you can also expect to do away with any of those pesky associated fees.

3 – Universal

Cryptocurrency can be used anywhere in the world. No conversion necessary. The benefit of this is substantial for those who frequently do business globally, oftentimes limited by government restrictions or less than favorable exchange rates.

For example, capital controls in China banning overseas investments have presented a real challenge for their community of investors, who actually make up the largest percentage of foreign investors in U.S. commercial real estate. However, many of them have strategically switched to using cryptocurrencies, as it cannot be regulated by their government.

4 – Verified

According to Forbes, “blockchain can make MLS property data more centralized and accessible, title records easier to track and transfer.”. These are the principles blockchain was built on. And while platforms like Zillow have make progress on making things public and bringing information to the masses, they often come up short when it comes to total accuracy and speed. This is where blockchain really shines.

The Impact on Property Management

You may not be seeing the effects of the crypto wave just yet, but it is coming. There are two key areas where you can expect to see the innovation and impact of this new technology.

1 – Leasing

We have smart phones and smart houses, so why not a smart contract? A smart contract is a self-executing contract that could end of transforming and ultimately improving the entire leasing process.

The terms of the agreement are written into lines of code, that automatically activate when triggered by an action. If “A” takes place, then “B” will occur. For instance, if you make a payment late, then you will be charged a higher amount. These conditions are pre-determined and happen automatically, taking the human element and area out of the equation.

This could be game-changing for landlords in terms of holding their tenants accountable, not to mention helping to reduce the frequency of late payments.

2 – Rent Collection

While the prospect of collecting rent via crypto is enticing, it would be advisable for landlords to hold on to their traditional bank accounts for the time being. The world of property management has forever been slow to change and disruption, and this situation is no different.

There are landlords already accepting cryptocurrency as a form of payment for rent, but they are certainly not in the majority. Many slow adopters point to the unpredictability of the technology as their main reason for refraining. For most, it is just too early to call.

What’s Next?

Celebrating only its 13th birthday this year, Cryptocurrency is just getting started. For many industries and investors, they need to see what the future holds for this ambitious and volatile effort. And while the real estate market has already seen significant impact in the form of tokenization, verification, and smart contracts, only time will tell what improvements will be lasting ones. Perhaps it will change the industry as we know it. Stay tuned.