Without going into too much detail, it is this validation mecha- nism combined with the nature of the blockchain itself, combined with the public and distributed attributes that give users of cryptocurrencies confidence that the blockchain is accurate and immutable. It is also this combination of factors that made Bitcoin unique from all pre- vious attempts at creating a digital currency (there were several). It is not necessary to trust the Bit- coin founders in order to trust the Bitcoin currency. To the extent that other cryptocurrencies follow this formula, they, too, can be trusted — at least with regard to the validity and immutability of transactions. Cryptocurrencies really came into the public consciousness in 2017 when numerous cryptocur- rencies issued initial coin offerings (ICO) and several of them raised hundreds of millions of dollars in investment. Speculation ran wild and Bitcoin reached nearly $20,000 per coin. The amount of money raised caught the interest of regulators and both the IRS and the SEC issued opinions about tax treatment of cryptocurrencies and whether they were securities under U.S. securities law. In 2017, just about anything with blockchain in its name appeared to be invest- able. Numerous approaches to cryptocurrency were launched. The speculation market has calmed considerably and in its place is a more considered treatment of cryp- tocurrency that recognizes that, in fact, there are different types of tokens that have varying regulatory treatment and are useful for differ- ent purposes. Today, several different types of cryptocurrency are recognized, and authors categorize them in varying ways. The types of cryptocurren-
cies derive their value in different ways and have different regulatory treatments. We will also distin- guish between a coin, which has its own blockchain and a token, which is recorded on another blockchain. For purposes of our real estate dis- cussion, I want to divide cryptocur- rency into the following categories: barter currencies like the Troptions (Trade Options) tokens and BC-REX (bitcoin for real estate exchange). Currencies are intended to act like digital money and are used to buy things. The IRS treats these cryptocurrencies as assets and the SEC agrees that they are not securities. Currencies derive their value from the markets that accept them for payment. In this way, these currencies are just like dollars, euros, and other national currencies (typically referred to as fiat currencies since they get their value because a national govern- ment says so). The value of a dollar is what you can buy with it just as the value of a Bitcoin is what you can buy with it. SECURITY TOKENS There are many security tokens and these types of tokens, along with utility tokens, represent the greatest current growth in the number of new tokens issued. Security tokens derive their value from ownership of an underlying asset, like a company (acting like stock in a company), real estate (representing ownership of a property or the LLC that owns it), or artwork (own a piece of a Picasso). These tokens are treated as securities by the SEC so all securities laws must be followed when issuing, selling, or trading these tokens. CURRENCIES These include Bitcoin and Litecoin and also include
UTILITY TOKENS
Utility tokens repre-
sent value within a particular company for its products or
services. Examples include game companies that issue tokens that can be redeemed within a game for additional characters or capabili- ties. One of the best examples of a utility token (though not a crypto- currency since it is not on a blockchain) is frequent flyer miles. Each mile is a digital token that is issued to airline customers when they buy tickets and can be re- deemed with that airline for seat upgrades, free flights, etc. It would not be at all surprising for airlines to convert their frequent flyer programs to utility tokens; it would be a good fit and may have market- ing advantages. There are a number of potential uses within real estate investing for utility tokens. These tokens are not treat- ed as securities by the SEC. Though other types of tokens and coins may be issued as smart contracts, I call out this category since it has broad implications in real estate. Smart contracts can implement numerous contract capabilities in an agreed upon and automated way. Since the entire process of purchasing, selling, or investing in real estate involves contracts, new, faster, automated methods for implement- ing the transaction can be done via smart contracts. SMART CONTRACTS So how can these different types of cryptocurrency be used in real estate investing? There are numerous approaches. Here are just five that may be some of the most interesting:
cryptocurrency. This is one of the most obvious approach- es. It uses currency tokens or coins and allows an investor to combine the rapid increase in value and some level of liquidity of the cryptocurrency with the stability, tax advan- tages, leverage of real estate. To date, most of the purchases of real estate with cryptocur- rencies have been two stage transactions (sell the crypto- currency for cash and use the cash to buy the real estate). But there have been some notable transactions of cryp- tocurrency directly exchanged for real estate. Cryptocurrency has especially strong potential for international sales since it is so easy to move the curren- cies without respect to borders (we will see how regulators end up addressing this.) 2. Issuing security tokens as part of a real estate syndication. Traditional real estate syndica- tions have several challenges including managing the in- vestors’ shares, handling the know-your-customer (KYC) and anti-money-laundering (AML) requirements in the U.S., as well as privacy requirements in
4. Loyalty programs for rentals. Utility tokens have a number of uses in real estate investments. If tokens are issued to rent- ers at an apartment complex, they can be saved up for a new amenity (like a ceiling fan or complimentary cleaning), used to defray rent, or used for a desired service like valet trash. The tokens would act as a loy- alty program, providing renters an advantage to staying at your property that could not easily be transferred to another prop- erty (just as the frequent flyer miles make you want to fly that airline to build up your miles).
Europe. Most important is the illiquidity of private offerings. Security tokens can address all of these issues. They can make all investor management much more automated and trans- parent and have the potential to increase liquidity as long as the tokens are available on an exchange that enforces all the securities regulations using smart contracts. 3. Real estate title on the block- chain. Nothing should be more immutable than a real estate title. Having it recorded on a public blockchain that is readily searchable by anyone and can include the necessary details (that are supported by smart contracts) can greatly simplify the search, management, and recording of a title. At pres- ent only prototype efforts are underway, but this application of blockchain to real estate has the potential to speed trans- actions and reduce the cost of title searches and title insur- ance. In a similar way, putting sale listings on a searchable blockchain may also impact the current multiple listing services and provide a better capability for real estate investors.
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Steve Streetman, president of StreetSmart Investments, LLC, a com- mercial real estate investing company, is an avid cryptocurrency investor and
has worked in cryptography and high-end com- puter modeling for over 30 years. He is currently working such diverse projects as weapons of mass destruction terrorism risk assessment, apply- ing artificial intelligence to selecting stocks, and deconvolving environmental and genetic factors in soybean and corn test modeling. He teaches commercial real estate investment courses and is a real estate agent with RealInvestors Real Estate Services. His book “Cryptocurrency and Real Estate: How Bitcoin and BlockchainWill Transform Real Estate Investing” is anticipated to release in fall 2019.
1. Purchase of real estate using
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