Ethereum Emerges As CRE's Preferred Crypto As Investor Interest Reignites

Nearly a dozen companies, including investors like BlackRock and Fidelity Investments, filed applications this week to launch exchange-traded funds using ethereum, the favored cryptocurrency of the commercial real estate world.

Many in CRE dipped their toes into crypto when the craze first hit the financial world years ago. But the renewed interest in the opaque digital currency spurred by a key Securities and Exchange Commission approval last month could open new doors for property investment. 

Phoenix-based NAI Horizon Executive Vice President Jeffrey Garza Walker told Bisnow he is hearing new buzz in CRE about crypto, and particularly ethereum, especially as major ETFs roll out. Garza Walker's specialty is industrial assets, and he believes that blockchain will be a normal way to transact commercial real estate within two years. 

“Certainly, there's a lot more momentum behind it now, a lot more velocity,” Garza Walker said. “There's a system in place to look at and start to get comfortable with. As people get more comfortable and feel that this is a safe way to transact, they are going to learn that it's quicker and much more easy than what's been traditionally done.” 

Ether trades on the ethereum blockchain, and the two terms are often used interchangeably.

Crypto is having its biggest week since before the crash in 2022, with investors pouring into the sector. Investments are being made in vehicles that didn't exist two years ago, such as ETFs that can invest directly in cryptocurrencies, like BlackRock's iShares Bitcoin Trust, which pulled in a record $520M in a single day on Tuesday.

Until recently, ETFs were only allowed to invest in crypto-adjacent entities, such as bitcoin miners. In January, the SEC approved ETFs that invest directly in bitcoin, and the agency may approve ETFs for ethereum in May.

As the erratic bad boy of the crypto world, bitcoin gets the glory and notoriety, but not wide acceptance by commercial real estate. As crypto's No. 2 entity, ether is a different story, quietly working its way into CRE.

Ether experiences less volatility than bitcoin, the stock price of which has whipsawed in the last five years, hitting a two-year high of more than $60K this week. Ether’s share price, meanwhile, reached over $3K this week, a 45% increase over last year.

In addition to being the more predictable of the two front-runners, ether is widely regarded as the best option for executing smart contracts, which are perhaps the most commonly used application of crypto among CRE professionals. Smart contracts can be executed automatically on ethereum, removing the need for intermediaries, and the system uses a special programming language that allows for high levels of customization.

Ethereum is the “settlement layer” of choice of Coinbase, the largest U.S. crypto exchange platform, according to Aaron Rafferty, co-founder of StandardDAO, a tech company that counts proptech among its specialties. In a crypto context, a settlement is the finalization of a transaction, such as a property sale, when it is stored within the blockchain.

“Any platform utilizing the ethereum blockchain is essentially using smart contracts, which takes money in and distributes dividends once conditions are met,” according to The Crypto Realty Group CEO Piper Moretti. “The transactions are more transparent due to blockchain technology, but what investors really care about are the ease of trading and liquidity and not having to wait months or even years to get their money in or out of a deal.”

Ethereum is also pivotal in the tokenization of assets, which allows investors to acquire relatively small pieces of real property, with ownership registered via blockchain.

The tokenization concept, which uses blockchain to create “tokens” — essentially ownership units in an asset — has gotten more attention for artwork than real estate, but commercial property is moving in that direction.

Early attempts at tokenizing real estate taught the industry some important lessons, particularly around which properties would work with the strategy.

In 2018, tokenization firms Fluidity and Propellr attempted to tokenize part of a commercial property in Manhattan and failed because investors weren't able to wrap their heads around the concept, Moretti said.

“The world wasn't ready for it, as only a small number of investors understood,” she said.

But when the owners of the prestigious St. Regis hotel in posh Aspen, Colorado, decided to tokenize not long after, investors were ready. 

Investors wanted in on the name and reputation of the St. Regis, Moretti said. The property sits at the base of Aspen Mountain in one of the priciest ski towns in the country. It is frequented by celebrities and high-paying business magnates.

While crypto-associated ETFs are grabbing headlines, ethereum is poised for an upgrade. An update called Dencun is scheduled to roll out on March 13, promising to make ethereum more efficient and, importantly for real estate, increase scalability for smart contracts.

“Ethereum’s upcoming Dencun upgrade will generally reduce the cost to use smart contracts via Ethereum Layer 2s, while retaining the Ethereum network’s underlying security,” Grayscale Investments research analyst Will Ogden Moore told Bisnow via email.

Grayscale is the world’s largest crypto asset manager, with more than $10B in assets under management.

“This dynamic, plus the fact that Ethereum is the second largest crypto protocol by market cap, could encourage commercial real estate industry participants to choose Ethereum Layer 2s as they explore future projects on the blockchain,” Ogden Moore said.

Still, there there are limits to what blockchain tech can do in a real estate context, said DGIM Law partner Isaac Marcushamer, adding that smart contracts might be more automated, but they won't take the place of courts in dispute resolutions or affect due diligence much.

“You look at zoning, pro formas, environmentals, mechanicals and architectural surveys. I can't conceptualize how blockchain affects any of that,” Marcushamer said. 

“Blockchain appears to be a secure way of tracking transactions that you want to make public,” he said. “That's a really cool way to replace the hundreds of thousands of pages, or millions of pages, that are sitting in the county clerks’ offices.”

But there's a catch: government approval of such transfers. Control over how that process plays out remains with state or local governments in the United States, and Marcushamer isn't sure that they will come around anytime soon.

“I don't see how, in the buying and selling of real estate, blockchain has the right ingredients yet to make something happen,” Marcushamer said. “Maybe someone will use it as a way to vet that you want to lease an apartment and use it to sign your lease, sure. But those are relatively friction-free transactions today.”

CRE is edging into ethereum-associated blockchain technology, but real estate is still real estate, Marcushamer said, in that it is a slow adopter of new tech.

“Blockchain isn't in its infancy anymore,” Marcushamer said. “I think it's a toddler or a preteen in its evolution. It's starting to have an identity, to be understood for what it is. But the pace of adoption in the blockchain field is going to be slow as we kind of continue to go through this period of uncertainty in real estate.” 

The spiking value of bitcoin and other cryptocurrencies in February is drawing attention to the sector, but since values are volatile, the normalization of crypto ETFs will be more lasting in its impact, Moretti said. Once the big players are in crypto, others will jump in, including real estate players.

“It's not just a fad, and it's not something that's just played out, because we have these large-scale financial institutions embracing it who have figured out a way to make it more accessible to traditional investors in ETFs,” Moretti said.

Wide-scale adoption isn't going to happen instantly, but the momentum is there, with the approval of ethereum-associated ETFs adding to it, she said.

“The more adoption, the easier it is for the real estate industry to embrace something like this,” Moretti said, referring to the use of ethereum for smart contracts and tokenization. “Companies like mine are primed for this kind of thing. We're ready for it. Other companies in the real estate industry, not so much, because they haven't been paying attention.”