Digital Currency: 4 Reasons Why CRE Is Still Slow To Adopt Bitcoin
The cryptocurrency known as bitcoin is catching fire. The digital currency reached record high prices in the last two months and is being used by major players in several industries, including Goldman Sachs, American Express and Shopify.
The same cannot be said for commercial real estate. Though there are many advocates of the technology (including Cushman & Wakefield, Deloitte and groups like the Blockchain Real Estate Agency) that see benefits in the currency — from the ability to complete transactions faster to blockchain’s secure and electronic ledger — industrywide adoption is still sluggish.
So what is the holdup? What concerns and challenges are keeping the commercial real estate industry from using this digital currency for property transactions en masse?
Bisnow spoke with blockchain and bitcoin thought leaders Max Ellerhorst, managing director at Trimont Real Estate Advisors, and Avi Spielman, founder and president of Joon Properties, about four challenges stalling CRE adoption.
1. Lack Of Understanding
Both experts attest that to the fact that one of the largest challenges stalling bitcoin adoption in commercial real estate is the industry’s lack of understanding about how the tech works and the benefits it can provide when closing deals. Blockchain, the software on which bitcoin is built, could eliminate the paper trail left when trading property.
“Historically, real estate doesn’t really adapt to tech really well. In many ways real estate still operates in the same way it always has,” Spielman said. “When you combine the idea of innovative tech with an industry that is historically not a good user of tech then that in itself [is a challenge].”
Though many players are curious about how blockchain and bitcoin work, doing research and sifting through the technical jargon to gain an understanding can be like opening a Pandora’s box of information that only leads to further confusion, Ellerhorst said.
“It’s a Pandora’s box that’s been opened. The companies that are going to be successful in the future will find a way to make it work,” he said. “[Commercial real estate] has so much transaction volume, and every time money is moved there is a tax on that — there is a service fee and banks get paid.”
Ellerhorst said dealing with e-currency eliminates the middleman. It is a peer-to-peer operation, which means banks and gatekeepers do not get a cut and the money remains undiluted as it is transferred from one party to the next.
“We’re 24 months away from really seeing anything in this space,” he said.
2. No Gatekeeper
Bitcoin was created in 2008 as a peer-to-peer system for digital transactions that bypass bankers' regulations and fees. That lack of a gatekeeper, though a benefit for some, causes others discomfort.
“The idea behind real estate in general is that you're looking for a stable hard asset. If you’re buying and/or selling an asset with currency that is unproven and not backed by anything, that creates trepidation,” Spielman said.
Earlier this year investors pushed for two bitcoin-backed exchange-traded funds to be recognized by the Securities and Exchange Commission, but both were denied, with consumer protection being a primary concern.
Ellerhorst said regulators’ lack of backing of this currency is exacerbating fear of security concerns in the market.
“Regulators will wind up motivating how we choose to do business,” he said. “You have rules that govern how you have to act, and those rules are extremely important so we don’t put clients’ money at risk. No one in the industry will say ‘get rid of all regulatory rules,’ but everyone will tell you regulator costs today are higher than they would like. … Hopefully with the continued advancing of blockchain you’ll see regulators become an advocate for it and not a detractor from it.”
3. Fraudulent Activity
Both Ellerhorst and Spielman believe past stigma surrounding bitcoin adoption in the market was the result of two things: fraudulent activity that once gave the virtual currency a bad name, and the perpetuation of these negative stories in the media’s coverage.
“We’ve got this ‘told ya so' mentality,” Ellerhorst said. “It is hard to be an early adopter of this technology because it’s hard to drive change with controls and regulatory pressure. You really just need one bad actor saying 'told ya so' and that could put it back.”
Spielman said he believes that stigma has evaporated with time.
“I would argue that that doesn’t exist anymore,” he said. “There has been enough smart money and big players behind these currencies that it's sort of eliminated this stigma.”
4. Security Concerns
This is one area in which the industry stands to gain a great deal. Commercial real estate properties are still overwhelmingly transferred through paper trails that increase the vulnerability of that information ending up in the wrong hands.
The way bitcoin works, when a transaction is made and bitcoins are transferred from one party to the next, a block of data containing a series of information is created. That block is linked to other bitcoin transactions in the market by a chain of coding, and is secured to a network of computers making it extremely difficult to hack or alter.
Not understanding how this technology works causes many to dismiss the technology as risky, but Spielman said the irony is that the security of Bitcoin far outweighs the current system in place.
“The more people participating on a blockchain, the more secure it is,” Spielman said. “This makes bitcoin one of, if not the most secure, [digital] currency out there.”