Title Now Podcast

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Cryptocurrency, Blockchain and Real Estate Transactions: An Update

Learn about the roles cryptocurrency and blockchain play in the world of real estate transactions.

Length: 34:49
Published: 08/12/2022

Listen In: Apple Podcasts or Google Podcasts


Find out about the risks, advantages, and how this may affect YOU in your practice.

Melissa Jay Murphy 0:06
Hello everyone and welcome to The Fund's Title Now Pop-up Webinar. I'm Melissa Murphy. And we host these webinars from time to time for the purpose of bringing you a quick update on a topic or maybe even a new topic. But we want to do this in relation to real estate transactions so that you can keep up to date with what's going on out there in the real estate world. We try to keep these simple, no PowerPoints, just a conversation. And then we push the audio out to our podcast, which is also called Title Now so that you can easily access the information again and share it with your friends and colleagues. It's really easy to subscribe, you can get it wherever you get any of your podcasts and it's free, of course, another benefit of Fund membership.
Melissa Jay Murphy 1:02
So, what are we talking about today? Well, it has been several years since blockchain, and cryptocurrency first surfaced in the real estate transaction world. It was met with confusion and a fair amount of suspicion, I believe.  Cryptocurrency continues to gain traction and we are hearing about it quite often in the news and in the media. You now see celebrities promoting the investment in cryptocurrency in fancy magazine ads, and in primetime television commercials. I guess the message is “Be like Matt Damon and invest in cryptocurrency.” But apart from what we are seeing in the media, we are seeing the use of cryptocurrency and blockchain coming back up again in the world of real estate transactions and real estate records. So, I thought it was time to get an update for Fund Members. We are fortunate that one of our very own underwriting attorneys is very knowledgeable about this topic and serves on the Blockchain and Cryptocurrency Subcommittee of the Commercial Real Estate Committee of the RPPTL section of The Florida Bar. The Business Law Section has a comparable committee on which she also serves. So, my guest today is Colleen Sachs, Senior Underwriting Attorney with The Fund. So, before I invite Colleen into this conversation, I want to make sure that all of you watching and listening today know how to post questions on the chat. One of our other Underwriting Attorneys, Caleb Hinton is monitoring the chat for us and so he'll come in at the end of our remarks and read off any questions that you might have asked but go over to the right-hand side of your screen and in that white box, go down to where it says chat. That's where you can insert your question and then under the drop-down box next to the word to pick Caleb Hinton as the person to whom you are sending your question that way it gets directly to Caleb, and there won't be any confusion. So hopefully that will work. We would love to get some questions. So, Colleen, welcome. Thanks for being with me today. And I want to start with some basics just to make sure we are all reminded of what we are talking about. So, tell us, what is crypto?

Colleen Sachs 4:00
Okay, well, crypto is a form of a digital asset. And it's based on blockchain, which is a network that's distributed across a large number of computers. So, cryptocurrency is simply a blockchain token. But keep in mind that crypto is just part of how blockchain can be used and the best-known cryptocurrency is Bitcoin. But there are about 12,000 cryptocurrencies, and that's double the number in the last quarter of 2021. We have about 1000 cryptocurrencies are being added each month.

Melissa Jay Murphy 4:35
I was really surprised when you told me that when we were getting ready to do this webinar. I had no idea there were that many cryptocurrencies and I think that adds to the confusion. But there have to be advantages to using cryptocurrency. So, what are people that are in favor of cryptocurrency saying are the reasons to use it? What are the advantages?

Colleen Sachs 5:01
Well, it's got a number of advantages. It's a fast money transfer without fees. It is a decentralized system that doesn't involve banks and a lot of people like that. It has the benefit of privacy, and it is much easier on international and on overseas transactions.

Melissa Jay Murphy 5:23
Those sound-like great advantages if they are in fact real. But I'll bet there are some disadvantages too. Otherwise, this wouldn't have, or this wouldn't have lagged in its incorporation into real estate transaction. So, what are the disadvantages?

Colleen Sachs 5:42
Sure, possibly the greatest perceived disadvantage in the use of cryptocurrency is the fluctuation of volatility. It's extraordinarily volatile. But some other disadvantages historically been the high consumption of energy involved in mining. All of that is changing. There are some more energy efficient means of mining nowadays, but also the use of cryptocurrency in criminal activities, such as purchases made on the dark web have given it a bad name, and they can have real consequences. There were recent fraud and Ponzi style cases that have involved many millions of dollars. One of them involved a $1.7 billion transaction in misappropriated funds, so they can have a very real downside.

Melissa Jay Murphy 6:31
Well, it seems to me it doesn't matter what type of currency you're dealing in. There are going to be fraudsters that try to jump people out of their money. But certainly, the lack of understanding of cryptocurrency combined with instances of fraud just makes people even more nervous. So, are governments starting to pay attention to this? Are there any regulations or laws out there that govern the use of cryptocurrency?

Colleen Sachs 7:01
Yeah, that's actually considered to be one of the downsides because there's some uncertainty in what the future holds regarding regulation. And we see this coming from regulatory agencies from legislation and from litigation. For example, there was a 2021 case from the United States District Court in the Northern District of Georgia. And it was in affect specific situation, but they found that the transaction for the sale of a house then included a portion of the payment in the form of cryptocurrency was an unlawful sale of unregistered securities. The various Attorneys General in states are monitoring crypto closely. Fannie Mae has new crypto requirements, and then you're going to see rules that are dealing with what they call KYC or “Know Your Customer” and AML which are “Anti-Money Laundering” rules to try to deal with security and FinCEN also comes into play. And then also in the title industry, a title company has to receive payment in fiat or US dollars. So, that can become problematic.

Melissa Jay Murphy 8:07
Certainly, a regulatory restriction on the use of cryptocurrency and I know that Florida, the legislature created and appointed a blockchain task force but that was with a pretty narrow focus, and not so much on regulating the use of cryptocurrency here in Florida. So, it'll be interesting to see if our state government gets involved in this in any way, but I do want to circle back with you about your comment about Fannie Mae requirements. Fannie Mae obviously plays a big role in the world of real estate transactions. So, give us some more information about these Fannie Mae guidelines.

Colleen Sachs 8:55
Okay, well, in fact, the Fannie Mae guidelines say that virtual currency that has been exchanged into US dollars is acceptable for down payment, closing costs, and financial reserves. If there's been documented evidence that the virtual currency has been exchanged into US dollars and held in a US or state regulated financial institution, and the funds are verified in US dollars prior to the loan closing. A large deposit may be made from virtual currency that was exchanged into US dollars. The lender also has to obtain sufficient documentation to verify that those funds originated from the borrower's virtual currency account. The virtual currency may not be used for the deposit on a sales contract for the purchase of the subject property. Once again, it will always have to be exchanged into fiat. If it's a large deposit, then they're going to have to see that this came from the borrower's virtual currency account.

Melissa Jay Murphy 10:04
Those guidelines don't seem terribly inconsistent with current lender guidelines for proof of source of funds. It just makes it very clear that we're not going to verify your crypto currency balance or value. We're going to want you to convert that first but you're going to have to show the chain of custody of your cryptocurrency being converted into US dollars and proving all of that. So those don't seem contradictory or conflicting with sort of the way things have been done in the past. But also, doesn't seem to conflict with our underwriting guidelines. So, it seems like we're going to be fine with Fannie Mae when it comes to cryptocurrency, right. So, let's move to the world of real estate. So why are these topics again something of interest to the title industry?

Colleen Sachs 11:03
That's because it's actually affecting the market now. There was a survey that was conducted by the real estate brokerage firm, Redfin. It showed in the fourth quarter of 2021 nearly 12% or one in nine of first time us homebuyers sold cryptocurrency for either part or all of their down payment. Millennials made up a large part of this number because they’re so many first-time homebuyers in that range. Another interesting point is that there's some speculation that some of this is tied to the pandemic. There was an increased interest in crypto by people who had jobs during the pandemic. They had extra money because they weren't traveling, they weren't going out to eat as much and they started dabbling in crypto in their abundant spare time. But you have to keep in mind that fiat and in our case, US dollars are still going to be needed for things such as recording and other closing costs. So, contracts that involve crypto need to address that fact. You're going to have to have US dollars at some point and they're going to need to address who takes on that conversion risk. There are some also some new areas in the industry, new companies that are popping up to serve this industry. Companies that verify that the currency that's being transferred and companies and payment processors who coordinate the transfer of the currency. All of those things are going to make the transaction much safer than a pure wallet to wallet transfer. We don't have this in Florida yet. But Wyoming and Nebraska have both authorized digital banks.

Melissa Jay Murphy 12:38
Oh, yeah. Well, that will be an interesting change if that comes to Florida. But all these things that you mentioned, sound to me like the market is being affected by the consumers desire to utilize their cryptocurrency value to buy a house. So, they are required by various regulators to convert that to US dollars in order to operate in our world. But it seems like that is a factor now because when the buyer is asked “Where are you getting your money?” They say, “Well, it's in my cryptocurrency account.” So, everyone involved in real estate transactions needs to understand what the process is to take that cryptocurrency value and turn it into US dollars. So that we can get a contract written, we can comply with the lenders requirements who wants to comply with Fannie Mae requirements, we have to comply with our title insurance regulations. So, I love seeing changes in the industry coming from the consumer because usually it's from the government down and this is something that's coming from the consumer and bubbling up. I like it. So those are general things that are happening, but what's I mean, are there examples of cryptocurrency being used in Florida transactions?

Colleen Sachs 14:20
Yeah, there are and while Florida doesn't have all the regulation and things that some of the other states do, Florida is on the leading edge of transactions that are involving blockchain and cryptocurrency. There are different ways to use it. You can use it by selling crypto to get US dollars for closing as we've been talking about. You can transact directly in cryptocurrency, or you can create a non-fungible token that is used to document the transaction. So, for the first one, selling the crypto to get the US dollars, that's basically the same type of real estate transaction we're doing now. With the other two. We've got two really good examples. They've got the sale of a four-bedroom penthouse in the art building in Surfside that set in Miami Beach price per square foot record of $4,440.50 a square foot. The sale price was $22.5 million dollars. That transaction was completed in cryptocurrency which makes it the largest known crypto real estate transaction. In this case the conversion risk was on the buyer. So that was directly transacting it in cryptocurrency.

Melissa Jay Murphy 15:28
So, when you say the conversion risk was on the buyer, the buyer took the risk that the Ethereum value could go up, but they were still obligated to pay the seller at the same number of Ethereum.
Colleen Sachs 15:50
Melissa Jay Murphy 15:59
How do they refer to the cryptocurrency in a contract? Because you know, when you say $250. How do they refer to it in contracts?

Colleen Sachs 16:12
They're actually just referred to by the number of the item just like we do in dollars. So, we would talk about it in however many Ethereum. Another case that we have was dealing with the sale of a residence in Gulfport Florida. In that case, the sale price was 210 Ethereum. At the time that represented about $653,000 in US dollars. That was an interesting one because the home's ownership was by the award of an NFT or a non-fungible token. The home was titled in an LLC, and then the transfer of the LLC interest to the purchaser was represented by an NFT that was documented on the blockchain. So, it was kind of interesting. You won't see a deed. You'll see a deed into the LLC. But then the actual transfer was done by the transfer of the interest in the LLC, and it's documented by the award of an NFT.

Melissa Jay Murphy 17:20
Wow, so this adds yet another aspect of these cryptocurrency slash blockchain transactions that Fund Members need to know about. So, talk to us about how NFTs work non-fungible tokens.

Collee Sachs 17:36
Sure, an NFT, a non-fungible token, by their name or they are limited in number which creates scarcity. In the hope of the creator of the NFT it also creates value. So, an NFT has a unique identifying code. It’s not interchangeable hence it being non-fungible, it can be authenticated. The authenticity is very secure, because the NFT is on the blockchain. So that transaction is going to be encrypted. The network can then decrypt it for the transaction, it verifies it, it authenticates it, and then it records it in an unmodifiable environment. This has gained a lot of popularity. You see NFTs talked about a lot in the sale of digital art and sports related videos. As seen in the Gulf port transaction, it's now part of the real estate world.

Melissa Jay Murphy 18:40
When you say that NFTs are limited in number, explain that, who controls setting that limit?

Colleen Sachs 18:50
The creator of the NFT sets the limit. In the case of a sale of a piece of real estate, if you've got one purchaser that's buying the real estate, the number of NFTs are going to be one. You may have some kind of digital art that they may want to say, “Okay, I'd like to be able to sell this to 100 people or 1000 people,” sort of like you would see like a numbered print. The NFTs can be any number, but the fewer would tend to be the more valuable and in the case of real estate, generally it would just be one.

Melissa Jay Murphy 19:28
Can the owner of an NFT for example, the sole member of this LLC, that owns this house? Can they create undivided interests in an NFT?

Colleen Sachs 19:47
Sure, they can. It's just like you would own any other asset you can create interests in it. Right.

Melissa Jay Murphy 20:00
Well, that may be a topic for a whole separate webinar when Members start asking questions about that. All right, so we've talked about cryptocurrency. We've talked about NFTs and how they're playing a role in real estate transactions, but we haven't really talked much about blockchain. So again, back to basics. Tell us again what blockchain is.

Colleen Sachs 20:26
Sure. So blockchain, it's an unchangeable, distributed digital ledger. It's going to be a ledger that shows ownership and everything just like any other ledger would. It's not changeable. It's going to be stored in multiple places on a peer-to-peer computer network. So, you've got computers all over the place that are going to be storing this information, and that makes it secure because if it's changed on one computer in the network, that will show that it's been changed on the other computers. So, it makes it a lot more secure because you are automatically alerted that there's been a change on the blockchain.

Melissa Jay Murphy 21:10
So that's how you can know that this NFT hat represent your interests in this LLC is not going to be transferred inappropriately or fraudulently because it shows up on all these different computers. And they would say, wait a minute, that's not supposed to be messed with.

Colleen Sachs 21:30

Melissa Jay Murphy 21:31
How is blockchain now being used in the real estate industry? What are the new things that you're seeing out there on that?

Colleen Sachs 21:45
Oh, it's got some really excellent applications in real estate, I think it's going to be much more widely accepted much more quickly than the use of crypto, while crypto has a fair amount of downside because of volatility, and bad actors, blockchain doesn't. It has the advantage of being very secure. We're seeing timeshare developers documenting ownership interests on blockchain that creates NFTs that represent that interest. The same goes for commercial real estate leases. It's already being used in recording real estate records in some states. Not in Florida yet, but in other states. The benefit is there's greater efficiency due to the digitization of the process and it's an accurate record of ownership that updates in real time.

Melissa Jay Murphy 22:38
But let me ask you about the use of blockchain and real estate records because in Florida, of course, we have a very broad public records law. And we're very protective of that and of the public's right to access public records. So how would a citizen be able to access real estate records on blockchain?

Colleen Sachs 23:10
Well, they will have the same access as they have now. Looking at the computer and actually in some areas, where they're recording documents, deeds and things like that on blockchain, you will see a deed that will be stamped with a QR code. You can then put your phone camera over that QR code, and it will bring up the copy of that deed. So, it is something that can be set up. It can be very private, particularly when you're dealing with NFTs but you can have the blockchain be open, very open to the public as well. It’s tamper proof and disaster resistant since it's this decentralized ledger. If something goes down, if we have a storm and it takes out a courthouse, that has the server in the courthouse, instead of the records just being destroyed and losing them. It would be accessible through one of these other computers on that peer-to-peer decentralized ledger. We've got some areas are actually recording things on blockchain right now. South Burlington, Vermont has partnered with Propy, who was the company that did the Gulfport Florida transaction, to develop a blockchain based deed registration system that's going to store deeds on the Ethereum blockchain. Cook County Illinois has a blockchain pilot program in their office of the recorder of deeds. In what is the most blockchain friendly state, Wyoming. Teton county is putting all of its land transaction records on blockchain. That doesn't mean it's going to make title searches unnecessary, but it is going to make the searches more efficient and more reliable. It gets rid of the ability of someone to alter records in the courthouse so it's just very, very secure.

Melissa Jay Murphy 25:05
Interesting. Well, it'd be very interesting to keep an eye on this trend of utilizing blockchain, for the recording of public records. That's something that the industry is going to have to pay a lot of attention to. Lots of great information, certainly new stuff going on new ways that these new types of currency and representations of ownership are being used. What would you say are the five takeaways for a Fund Member from this conversation?

Colleen Sachs 25:47
Well, Fund Members need to have some level of awareness of this trend than the industry because things are happening now. They need at least a very basic knowledge of the fundamentals when they're dealing with contracts. If your client is involved in a transaction involving cryptocurrency, you need to understand who was going to take the risk of volatility of the currency and you're going to also have to determine who is going to have to fund the closing cost with US dollars. Keep in mind that our underwriting position has not changed, we are not able to ensure wallet to wallet transactions. So said another way crypto has to be converted into US dollars, simultaneous with or before the closing for the entire transaction. But be aware that if you're dealing with Fannie Mae you may have to prove that source of funds. Then be aware that this concept of an NFT has been used to document ownership and an LLC. And just stay alert for any aspect of this that's coming to Florida because it's not a matter of “if” but a matter of “when.”

Melissa Jay Murphy 27:00
Well, I would agree with all of those takeaways. I would also be so bold as to say that as things change and any aspect of this comes to Florida, you will hear it from us here at The Fund as soon as we hear about it, so we will keep you up to date. Caleb, are there any questions out there from the attendees?

Caleb Hinton 27:22
Yeah, we actually got quite a few. The first one was with relation to NFTs and using NFTs instead of a deed. What is the trend? Because you were talking about at the end some of the advantages related to the security of using NFT on the blockchain to record and follow the chain of title. Do we see it going towards using NFTs in lieu of deeds in the traditional sense, or is it just kind of this niche thing right now that people are kind of playing with?

Colleen Sachs 27:55
There isn't really a trend because there are different ways of doing it. If there is a trend, it is mostly in people converting their crypto into fiat before a transaction, so having a very traditional transaction because they want to be able to get title insurance. They're purchasing property from someone they don't know. They want to have title insurance. If you are just transferring the ownership interest in the LLC, you don't have all of the same things you would have with a traditional closing. We are seeing that it was used more or less to make it possible to have this auction and the payment actually happened in crypto, the house in Gulfport. I also see that as being kind of a something that was a good marketing for property, the company that handled it, so it definitely got it into the media and got people talking about it. I don't see that as a trend at this point. I think we're going to see more conventional closings, but with money coming from crypto that's been converted.

Caleb Hinton 29:06
And then broadly just back to the Gulfport deal. One of the questions was, they didn't trade an NFT for the house. The NFT was how they were. In other words, how they documented the deal, right?

Colleen Sachs 29:20
That's exactly right. That's how they documented it. They had an auction so the money actually did come from a cryptocurrency wallet. They had the auction, and the payment was for the interest in an LLC that held title to the house. Then the transfer of that interest in the LLC was documented on blockchain for security purposes, instead of having a deed recorded, transferring the interest in property. So, the deed that is recorded on that house is actually still the deed into the LLC. The LLC interest just transferred and instead of having it not be something that people could see in public, they transferred it on blockchain to keep it secure and safe from anybody coming in and making a change do it that shouldn't.

Caleb Hinton 34:45
The next question, I guess that logically follows from there. Okay, now you've done this deal on blockchain and you have this NFT that is the ledger, if you will, for that deal being done. How do you do the next deal, but based on what you just said, basically, you can still do a good old-fashioned deed out of the LLC into a new buyer it’s just the NFT that kept the ledger.

Colleen Sachs 30:39
Yeah, you absolutely can. You can and for purposes of that, if it's a transfer from that LLC into a third party, then you're going to have a deed out, you're still going to have an LLC that is that the interest in the LLC is represented on blockchain, but it no longer holds title to that property. If it has anything else in it, then it may have some value, but the property just comes out. The other way that they could handle it is they could actually transfer the interest in the LLC and record that transferred to the blockchain as well. So that would show that chain of interest in the LLC.

Caleb Hinton 31:21
Okay. And then, and I've seen some of this in the news. So, I'm actually curious on your answer on this as well, who is the regulatory body on crypto?

Colleen Sachs 31:30
Well, it depends. I mean, right now, there is not a lot of regulation. We're getting more and more than the State's Attorney Generals are coming into play some. We're seeing some states that have a separate for example, Wyoming is extremely blockchain friendly, and we're seeing that regulation through statute in that state, and they have set up regulatory agencies within the state to deal with it. In Florida right now, we're still looking basically at the Attorneys General. And then we see regulation, of course through entities like Fannie Mae, that they have said, if you want to deal with us and you want to use blockchain, these are our criteria. It's very decentralized at this point.
Caleb Hinton 32:15
Right, all over the place. And then with relation to Fannie one of the questions was, are they actually asking that you prove up your ownership of the tokens before you are to do a deal? In other words, wallet to wallet as you put it?

Colleen Sachs 32:32
Well, they don't allow a wallet-to-wallet transfer. Fannie Mae will not allow that they will allow virtual currency if you have converted it to US dollars. If you have a large deposit and this is sort of like if you know it's a source of funds matter for them when if they want to know if you've gotten a gift or if you've gotten money from somebody else, same type of thing. If you're going to have a large deposit, they're going to want you to verify that those funds originated in your own virtual currency account. So, you've got to show that those funds came from you. Just like you might have to show that money came from a bank account when you're doing a closing.

Caleb Hinton 33:08
One last question. Ethereum, are there any other digital, any other blockchains that are being used as a ledger, or is it just Ethereum that seems to be taking point with real property transaction?

Colleen Sachs 33:27
Ethereum is definitely the leading edge in real estate transactions. You’re seeing Ethereum used as the ledger, and then you're seeing the Ethereum tokens used to determine the price like the transaction in Florida was 210 Ethereum. So, you're seeing that for the price. That's really the primary one. You do not see transactions happening really in Bitcoin, very often. They can but they're not really happening in Bitcoin.

Melissa Jay Murphy 34:07
Thanks, Caleb, and thanks for all of those really great questions. And thank you for attending today. I think we've wrapped up our conversation. I hope it's been interesting. I hope it's been valuable. And again, look for us to push this out on our podcast, Title Now, so that if you want to listen to this again, or share it with your colleagues as the easiest way for them to get it, and send me your suggestions for future pop-up webinar topics, I would love to hear from you. And of course, as always, thank you for your support of The Fund.

Real estate transactions involving cryptocurrency may expose the parties to the transaction, the title agency and the underwriter to several unique risks. These transactions may not be insured without a thorough underwriting evaluation and written authorization. Significant considerations include liability related to dealing with unknown parties in real estate investment, unknown sources and payees of funds and valuation concerns. Fund Members who encounter requests to insure a transaction involving cryptocurrency must contact their underwriting counsel for evaluation and authorization.  Due to these unique risks, Fund Members are cautioned to refrain from advertising the ability to close transactions involving cryptocurrency. Additionally, closing protection letters will not be issued for these transactions.