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HOW CRYPTOCURRENCY COULD AFFECT THE COMMERCIAL REAL ESTATE INDUSTRY
Just because you invest in bricks and mortar, the most tangible of assets, don’t imagine you won’t be caught up in the virtual world’s crypto web.
Eventually, everyone who is in business will come face to face with blockchain technology … its reach will find you.
And when it does, you will be relieved because this platform offers transparency when you need it, uniformity of data systems and best of all, high security. That last one will be increasingly important as hackers become more sophisticated and greedy for your private information.
What is the blockchain
According to the authors of Blockchain Revolution, D. and A. Tapscot “the blockchain is an incorruptible, digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
This internet-based platform allows information to be securely transmitted between B2Bs in an encrypted form, but not copied. Thus, it is considered to be unhackable.
Blockchain decentralises financial information in a way that avoids clearing houses, such as banks, and this makes the data difficult, some say impossible, to steal.
The brainchild of a mystery programmer using the alias Satoshi Nakamoto, the technology first surfaced a decade ago. Years later, it was seized upon by the creators of Bitcoin.
The rationale behind this cryptocurrency was that it could avoid mainstream banking systems to facilitate transactions. These are recorded in a virtual ledger that can only be accessed by verified entities.
How it works
When a blockchain transaction is requested, the information is distributed to a network of computers. Algorithms are used to verify the request and, if authenticated, a corresponding transaction (think demand meets supply) is matched to it and amalgamated to create a “block” of data.
This block is then added to a chain of other blocks of information. The way it is programmed prevents it from being altered or erased. For simplicity’s sake, some have described blockchain like a spreadsheet that is copied to thousands of computer systems that continuously reconcile the data.
So, how is this technology relevant to property investors?
Well, the platform can be used for all manner of transactions, not just those involving currency. It can be used to exercise contracts, record information and many other, perhaps not yet imagined, B2B uses.
A recent Deloitte report stated that real estate transactions where the integrity and the security of the data are paramount, such as purchases and sales, or financing and leasing, can be made using blockchain. Eventually, the platform may also be used to manage a property portfolio’s water and energy usage, parking and waste services.
“Many times, participants in leasing and purchase, and sale transactions are new to each other and could be over-cautious in due diligence, and may even have data integrity concerns. However, blockchain can help reduce the risk through digital identities and more transparent record-keeping systems for real estate titles, liens, financing and tenancy,” Deloitte stated.
The perks of blockchain
Among the challenges the blockchain platform may be helpful in overcoming are:
- Inefficient property searches resulting from fragmented listings
- Time-consuming, paper-driven due diligence
- Managing ongoing lease agreements, property operations and cash flows
- Hampered decision-making because of an absence of real-time data
- Slow and expensive settlements, especially in cross-border transactions
- High-risk and costly searches of titles and insurance information
If implemented properly, the scope for blockchain systems to improve efficiencies and save money during property deals is great if third parties, such as registries and banks, can be bypassed.
Blockchain in practice
Earlier this year, Californian blockchain start-up, Propy, commenced a pilot project to record conveyancing documents in conjunction with the South Burlington municipality.
In India, fintech company RealX uses blockchain technology to promote fractional ownership of expensive but modestly sized properties. Its first deal last year, allowed 20 investors to buy a 14 square metre Maharashtra commercial property, much like a syndicate which owns a racing horse.
Keep in mind
But, as Deloitte cautions, the technology is in its infancy in relation to the commercial real estate sector and would need significantly more research and development before it could completely supersede all current operating systems.
The same is true of highly volatile virtual currencies, which are not regulated by financial authorities in Australia or most other parts of the world.
Chinese, South Korean and Japanese watchdogs alarmed by the huge cryptocurrency losses in trades and heists are increasing their scrutiny of virtual transactions.
In fact, late last month (January 2018), a Tokyo crypto exchange called Coincheck confessed that hackers had stolen AUD$660 million from individuals’ digital wallets. Preliminary investigations revealed that the exchange did not use the usual checks and balances that make blockchains safe, such as storing assets offline and dividing security keys among several devices.
Take it as a lesson
No doubt, this episode will have lessons for European fintech, BrickCoin, which will soon be launching a virtual currency called BrickCoins to directly invest in listed property funds, similar to Australian Real Estate Investment Trusts (A-REITs).
BrickCoins will be highly liquid and as safe as houses, according to the company. It says BrickCoins will buy a slice of the property trusts and be more stable than other cryptocurrencies because they will be invested in a stock exchange-regulated asset.
By offering a virtual transaction that is effectually a tangible investment, the developers believe that more investors are likely to be attracted to the world of crypto business. It claims BrickCoins will reduce the risk of losses through hacking and extreme price fluctuations. Importantly, BrickCoins will be subject to a layer of regulatory discipline, making them more attractive to risk-averse punters.
Speak to an expert
If you are in the business of commercial property investment, expect that these virtual technologies will soon tap into the way you manage your brick and mortar assets … it is inevitable.
Until that happens, the seasoned commercial property consultants at TGC are available to help you navigate the complex maze that the Sydney property market is fast becoming. Whether you are looking to buy, sell or lease commercial strata or freehold properties, we have the experience to get you the best results. Contact us today!