Buying a home with cryptocurrency is possible, but not recommended ... yet!

Cryptocurrencies (cc), particularly Bitcoin, are increasingly being accepted globally as an alternative to cash when purchasing a property. Across America, many residential properties, particularly the high-end market, are pegged in both dollar and bitcoin currencies. This poses several questions, among them, being whether SA will follow suit and how agents should approach what currently appears to be a novelty.

To answer some of these questions is Pieter Niehaus and Desiree Reddy from Norton Rose Fullbright South Africa. Niehaus is a Director in the Real Estate industry, and Reddy is a Director in Banking & Finance Practice. Upfront, both agree that while anything is possible, cryptocurrencies as a medium of exchange for property transactions are not likely to be adopted en masse in SA in the near future, and this can be attributed to many reasons. Some of the reasons are:

Blockchain as a driver

Firstly as Niehaus points out, cryptocurrencies use blockchain technology, which is being investigated as a mode of transacting in conveyancing matters. "At present, the whole process of buying and selling property and effecting transfer of ownership in the deeds registries cannot utilise some of the efficiencies of blockchain. Should that change, and blockchain tech begins to drive property sales transactions and registration mechanisms, then cryptocurrencies may well find their way into the system, but for one hurdle; cryptocurrencies first need to be accepted as a legal tender in South Africa."

"Cryptocurrencies are currently unregulated in SA," explains Reddy. "This means that sellers, real estate agents, and attorneys are not obliged to accept cryptocurrencies as payment, but may at their discretion, choose to accept such a form of payment."

Protocols of compliance

For a deeper understanding of the implications, Niehaus expands on the current law around property sale agreements, which usually specify that the purchase price is to be secured either by cash, bank guarantees, or a combination of the two. "In the case of bank guarantees, the sale agreement normally specifies that the guarantees are based on such terms and conditions that are acceptable to the seller.

"Conveyancers also need to comply with strict protocols that are monitored by the Legal Practice Council, ensuring that monies pass-through trust accounts to properly reconcile funds due to sellers, purchasers, and agents. In the absence of cryptocurrency regulation, conveyancers are bound to abide by the current professional standards and rules".

Reddy highlights that, assuming all parties involved agree, there is no restriction on the use of cryptocurrencies in the context of real estate but ancillary considerations will have to be seriously tested.

All role players, especially conveyancers and banks, therefore need to have a firm understanding of blockchain technologies, how they work, and how they are allocated in the value chain. "In essence, this includes how banks will settle mortgage loans; the impacts on estate agents in terms of their commission; purchasers in respect of interest earned on any deposits paid; and the sellers who, of course, are the parties that most want to see the funds hit their bank accounts," says Niehaus.

Value of cryptocurrency

Should all parties agree to a cryptocurrency sale/purchase, one of the biggest dilemmas is how to determine the price of a property in crypto terms given the fluctuations in the value of digital currencies, and that most are not pegged to a traditional commodity like gold. Reddy says that digital currencies that are pegged, are usually linked to the specific value of a bank-issued currency. "The effect on the value of a real estate transaction will depend on whether the cryptocurrency chosen is, in fact, pegged. Bitcoin, for example, is not a pegged cryptocurrency; its value is driven by market demand."

Niehaus agrees. "Some cryptocurrencies are subject to wild fluctuations, so a seller will want certainty that they are not underpaid should a cryptocurrency unit suddenly depreciate. Similarly, the purchaser does not want to overpay for the same reason."

It gets even more complicated when you consider the inevitable passage of time between the conclusion of a sale agreement and registration, due to the regulatory requirement to obtain rates and levy clearances and transfer duty receipts from SARS. "Cryptocurrency value may well change dramatically during this timeframe, which triggers the question, at what value do you calculate transfer duty given that SARS requires payment on the full value of the transaction?" asks Niehaus.

Market changes

There is talk that should cryptocurrency become an acceptable legal tender, it could open South African real estate to markets that have traditionally been unable to afford to purchase a property. Reddy responds: "Initial thoughts are that this would not necessarily be the case as such communities are unlikely to have invested in cryptocurrency in the first place, are generally unfamiliar with it, and the perception still prevails that it is not a reliable or safe investment," says Reddy.

Regardless, future-thinking property owners may soon start pushing the industry forward into blockchain and cryptocurrency as the benefits begin to be made evident. One such benefit is a shorter transaction period but again this is dependent on an overhaul of the entire sale/purchase and conveyancing process.

Niehaus emphasises that the shift in mindset around cryptocurrency as an acceptable medium of exchange on a property is largely dependent on the amount of thinking and will to change traditional processes. "It's not impossible; we can liken this to the early resistance to online shopping platforms, which are now being used on a regular basis and performing as expected.

"And it is also not that long ago that a brave merchant decided to accept a consumer's small piece of plastic, placed into a manual device where copies of the credit card were made in triplicate, as a valid means of payment ...."

Will the cryptocurrency bubble burst?

Those who are invested in it are adamant that it is the currency of the future, and credit it for being independent of governments and financial services providers. There are obvious reasons, therefore, for many parties to wish to maintain the current status quo of traditional, working procedures. It will likely take an almost overwhelming buy-in and shake-up before the property sector is prepared to change and become progressive towards cryptocurrency, but even that is dependent on whether the people want it.