By Henry Elder & Paul Monsen, Digital Asset Advisors
Blockchain technology is equal parts derided and full of promise. It offers a revolution on the order of the internet, but like the early internet, the blockchain is poorly understood and can be used by anyone - legitimate business people and criminal elements alike. The technology has the potential to open up borders for international real estate investment, create liquidity for previously illiquid positions, compress transactions from a multi-month process to weeks or days, end the tyranny of wire cutoffs, and offer many other efficiencies. Unfortunately, up until 2017 the blockchain was a largely unregulated place, with many scams, frauds, and crimes utilizing the lack of oversight to flourish.
From 2009 through the end of 2017, the blockchain industry grew to nearly $1 trillion by market cap, then experienced a significant contraction as regulators stepped in and popped the bubble. This bear market in cryptocurrency prices, combined with regulatory scrutiny, has had the welcome effect of “washing out” most of the low-quality projects from the industry, and has allowed regulated services to emerge with practical applications in the field of real estate.
First, a quick explanation of what blockchain is. The internet operates by a network of computers (including yours!) sending data back and forth. The blockchain allows you to send data back and forth that is provably unique. Uniqueness is necessary in order to digitize anything of value. If you purchase a digital certificate entitling you to ownership of Gold Bar #1 in a vault, you need to make sure that the seller of that certificate didn’t sell 1,000 other certificates of ownership for Gold Bar #1. With the internet, you need some trusted intermediary to verify that there’s only one ownership certificate for Gold Bar #1 in existence. The blockchain does this automatically, by maintaining an auditable, immutable trail of every data transaction that occurs on the network. The transactions are grouped into “blocks”. It’s this record of transactions that makes up the “blockchain”. Some blockchains have been doing this without failure for over a decade, and transfer billions of dollars on a daily basis. This part of blockchain technology is called the “protocol layer”.
The protocol layer allows many of the cumbersome, manual, paper-based processes for value transfer to become fully digital. What this further allows for is the creation of software on top of the protocol layer with simple and easy-to-use interfaces and experiences for digital transfer of ownership, including across borders. This opportunity is being applied across various segments of the real estate industry, including title, escrow, residential purchases, commercial investment, investor management, and compliance.
On the residential side, startups have been innovating since 2015. Velox.re implemented one of the first experimental pilots of title on the blockchain, working with the Cook County Recorder’s office to test the process of registering a title on the blockchain and effecting a transfer. Propy, another blockchain startup, is building a combined MLS and online transaction platform to streamline more of the residential sales process. Propy picked up where Velox left off, and has been working with three counties in Vermont to register residential titles on the blockchain. Meanwhile, the core Propy transaction platform has facilitated millions of dollars worth of residential real estate transactions, all across the world. HouseHodl is another startup, which is using the value-transfer mechanism of the blockchain to cre¬ate innovative new escrow solutions that could reduce the costs and risks of the escrow process. Brokers such as The Crypto Realty Group have built a foundation of acceptance by buyers and sellers for using cryptocurren¬cies such as bitcoin to purchase homes.
In 2018 we saw the first commercial real estate trans¬actions move onto the blockchain. Slice.market “toke¬nized” one of the first commercial properties in the country, taking a $5 million LP equity position in an NYC ground-up development and legally endowing ownership into blockchain-based tokens. Those tokens were then sold to international investors, which not only paved the way for more international investment into US real estate, but also offered liquidity to the to¬ken holders that a typical LP equity investor wouldn’t enjoy. By the end of 2018, tokenization was in full swing, with Elevated Returns tokenizing the St. Regis resort in Aspen, Propellr tokenizing a condo project in NYC, and Harbor tokenizing a student-housing project in South Carolina. Companies such as Open Finance Network are providing blockchain-enabled trading sys¬tems to trade the tokens, creating liquidity in even the driest parts of the real estate capital stack. Each of these projects has broken new ground in terms of removing frictions that are traditionally inherent in the transac¬tion process, creating streamlined new investor- man¬agement systems, and most importantly, refining and perfecting the compliance and secondary-market liquid¬ity tools that will upend how the market perceives real estate liquidity.
As we move further and further from the wild days of 2017 towards regulated, compliant solutions, the prom¬ise of blockchain only grows greater. The pilots of 2015 through 2018 have demonstrated many of the potential efficiencies that blockchain can bring to our industry, and larger deals are coming down the pipeline with ma¬jor institutional players seriously considering the tech¬nology. Ultimately, widespread adoption is a prerequi¬site to realize the full effect of blockchain’s benefits. For many in the blockchain field, the focus this year will be on education and outreach to traditional real estate stakeholders. Blockchain is not a threat to most business models - it’s a huge opportunity to seize the future by understanding and adopting these innovative tools that are being built. We built solid momentum in 2018. Will 2019 be the year of mainstream blockchain adoption in real estate?