Bitcoin and hundreds of other digital currencies relying on blockchain ledgers have exploded in popularity. Exchanges exist for buying and liquidating. The user can be anonymous. It crosses borders without regulation. Digital currency has penetrated into areas such as web services, art and crowdsource funding, and there are a small number of reported real estate closings in Florida using cryptocurrency, though all involve lower-priced residential real estate.
How quickly crypto moves into more regulated and mainstream industries such as commercial real estate remains elusive. Miami’s office and other commercial real estate markets, with money from abroad and appetite for risk, could be an ideal testing ground. That being said, there are impediments.
Title insurance is baked into every commercial real estate deal. Florida’s title insurance regulations bar any company or agent from acting as a disbursement agent in cryptocurrency as this would violate the good funds rule under the Florida Administrative Code, which only allows disbursement of funds deposited, finally settled and credited to the title insurance agent’s or title insurer’s trust account. In addition, no title company will permit issue of a title policy showing Bitcoin or other cryptocurrency as insured value.
BIG BROTHER IS WATCHING
While the above could be resolved by liquidating the funds to cash prior to disbursement, it would change the transaction from crypto to cash and is not in keeping with the cryptocurrency peer-to- peer model. Additionally, exposing the title company to unnecessary risk due to the volatility of the value of cryptocurrency and issues pertaining to the source of funds (including illicit funds that could lead to later forfeiture of real estate) remain a concern. The U.S. Treasury Geographic Targeting Order against South Florida – while currently effective only as to larger residential transactions — is a reminder that the government is watching.
Commercial real estate deals generally require a significant escrow deposit. Even if a digital wallet could be created for escrow purposes, a title company might be unwilling to bear the risk. The professional rules regulating real estate brokers, which require deposits to be placed into a bank or similar account, seem unsuited for digital currency, including the requirement to convert to cash at the earliest practical time.
Florida attorneys would have similar concerns under the Florida Bar rules. A separate digital wallet specific to the transaction to hold the funds separate from any other client funds is needed. Whether through proper disclosure the law firm will bear responsibility for large pre-closing losses remains a concern particularly because the bar rules require an attorney to act with the care of a professional fiduciary.
VOLATILITY IS A REALITY
Even if, through whatever private arrangement, the buyer and seller in the cryptotransaction can work around these issues, institutional financing, which remains the bedrock for the large majority of office and other commercial real estate deals, would most likely be difficult to obtain. Whether a financial institution regulated by the U.S. government can or should include cryptocurrency shown on a balance sheet as funds available to repay debt or to establish equity for underwriting purposes remains questionable. High volatility of cryptocurrency is a reality. The need for title insurance and trusted intermediaries to close the deal addressed above remains problematic. The source of funds and identification of customers are serious issues.
Financial institutions bear the risk of Bank Secrecy Act and Patriot Act compliance. The private nature of cryptocurrency runs against the nature of legally required due diligence by financial institutions or other regulated sources of capital.
Perhaps Ethereum’s smart contract (or other peer-to-peer blockchain technology in development) will provide a workaround for certain of these issues. That being said, while the ability to preprogram certain contingencies and price adjustments in a peer-to- peer crypto real estate deal may work in a smaller residential setting, the use of such technology is doubtful in the context of a large commercial deal with multiple contingencies, price adjustments and the need for professional interaction from beginning to end.
Cryptocurrency has only scratched the surface of real estate. It will continue to evolve and will surely move into South Florida’s office and other commercial real estate. As it does, expect the players to find creative solutions, including more use of nonregulated private capital where financing through traditional means is unavailable.
Harold Lewis is a partner with Pathman Lewis in Miami. Contact him at email@example.com.