If you search the internet for the “top five ways that blockchain will impact X, Y or Z,” you will surely be offered the same results over and over again. Removing a central authority, speed, trust — all of these blockchain benefits also apply to real estate. In real estate, though, all of the examples seem to be trite, and if you really break it down, you realize there is a reason no one has taken these blockchain projects on — because they don’t really change anything.
I have been thinking about how we are applying blockchain to the real estate space. Blockchain could have a large impact and change the way real estate gets done, but it requires big changes, not just minor tweaks.
A Quick Overview Of Blockchain
Blockchain is a distributed ledger technology. It is the technology that Bitcoin and many other cryptocurrencies run on. Think of it as a ledger of transactions that, instead of being stored in your own desk at home, is stored and encrypted on thousands of computers around the world. All of these computers agree, not only on which transactions have occurred but also on what order they have occurred in. Anyone can download the blockchain onto their own computer and become part of the network. It is the power of these distributed personal computers that is used to validate and add transactions and allows blockchain to be a distributed system with no central authority. The action these machines take to validate transactions is called “mining.” The reward for successfully validating a transaction and adding it to the block is Bitcoin. This lack of a central authority and distributed public ledger that will allow the blockchain to grow beyond being a decentralized database of cryptocurrency transactions.
Funds Escrow
When a real estate investment needs to make a distribution — return funds generated by a property to an investor — typically those funds are moved from the property’s bank account to a bank account where those funds can be sent via account clearing house (ACH), wire, etc., to the investors. There are other options for distribution, like creating a trust or virtual account at the bank for each investor which can be held until a later date. Distribution typically depends on the terms outlined in the Limited Partnership Agreement (LPA). However, setting up virtual accounts or separate trusts and amending them for each investor can be costly.
The important thing here is that these funds are technically owned by the investor and should not be available to the firm, so as to avoid situations where the firm goes out of business and the investor loses access to those funds.
Blockchain could allow for a method that registers these distributions and locks the value into a token that is fixed to the U.S. dollar. Doing so would significantly alleviate work when sending distributions and could eliminate the need to set up costly bank accounts.
Liquidity
One of the holy grails in real estate investment is liquidity. Everyone wants their investments to be partially uncorrelated with the S&P in order to build a diversified portfolio, and real estate can certainly offer that. In exchange, you typically have longer hold periods — from 3 to 10 years depending on the investment strategy. Because of these extended hold periods, the question invariably comes up — “What are my liquidity options?” The answer can vary from “There is no liquidity” to “There is some limited liquidity and it comes with some sort of penalty.”
A secondary market could offer liquidity. It would give existing investors the ability to get out if and when they need to and new investors the opportunity to get in. If we register investments in the blockchain, we could more easily exchange shares between investors. Issues around loans and requirements would invariably come up, but if this market is known upfront, these issues can be part of the consideration from the get-go.
Beyond Initial Coin Offerings (ICOs) And Titles
Most articles when searching for real estate and blockchain reference real estate ICOs. These are certainly interesting and fun to read about, but recent guidance from the SEC regarding using tokens in exchange for equity means that we need to think bigger. I think we as real estate Fintech professionals need to start looking beyond the technology itself and explore the different ways it can be implemented to change the game in real estate.
Where To Start
If you’d like to explore Bitcoin’s potential in real estate further, I would recommend looking at the Ethereum Project, which is creating a platform for building blockchain applications. I have also found that reading other company’s ICO whitepapers can be educational. These whitepapers have very detailed information on how a company plans to use blockchain for their particular application and can often shed some light or spark some new ideas on how you can implement the technology.