The ripple effect of the collapse of one of the world’s crypto giants, FTX, is now being felt in the real estate industry. The cryptocurrency market was already volatile with values seriously fluctuating. But now, more than ever, sellers and developers are approaching crypto offers with caution. They are not necessarily an attractive option in these turbulent times.
As the world grapples with a lack of confidence in crypto markets, here’s what real estate brokers should watch out for to minimize your risk of a lawsuit.
Understanding Cryptocurrency
Cryptocurrency is digital currency, essentially “virtual money”, and with it comes some challenges:
- Cryptocurrency isn’t backed by any assets or government.
- There’s no central authority or institution standing behind it.
Blockchain is the system of digital recording ledgers that record cryptocurrency transactions. Blockchain ledgers are distributed but can’t be edited, so cryptocurrency can’t be counterfeited. Bitcoin is just one type of cryptocurrency.
Like many industries, blockchain and cryptocurrency have disrupted the real estate industry in recent years. Some brokers have even become cryptocurrency real estate specialists, and there have been some sizable real estate transactions using cryptocurrency. In 2021, a Miami penthouse sold for $28 million. The anonymous buyer paid for the property entirely with cryptocurrency. Another multi-million dollar mansion in Texas was sold and paid for with cryptocurrency. But, while many wealthy buyers have used cryptocurrency for property purchases, it’s not yet mainstream among everyday buyers.
It’s still essential for real estate brokers and licensees to maintain an understanding of what’s going on with cryptocurrency.
Risk of Price Fluctuations
Turbulence in the crypto markets right now increases the risk — to sellers, buyers, and even brokers, for transactions where cryptocurrency is involved. In a traditional transaction, the price is fixed. Payment via cryptocurrency can result in a seller receiving less or a buyer paying more at closing because of the rapid fluctuations in the value of cryptocurrency. Transactions are not reversible, so there is significant risk involved.
Risk of Fraudulent Activity
Supporters of blockchain technology espouse that it reduces the possibility of fraud. When transactions happen, entries in the distributed ledgers of blockchain are automatically recorded, visible, and unchangeable. Cryptocurrency payments are immediate and blockchain technology reduces the time (and paperwork) it takes to complete transactions. Some say this increases transparency and trust. However, the significant volume of paperwork involved in real estate transactions, in a way, also provides a protective layer, helping to reduce the chance of fraud. The streamlined process that cryptocurrency can provide might offer efficiencies, but things can go wrong with a faster closing.
Cyber Security Risks
As demand for new technologies rises, so does the sophistication of hackers and scammers who are looking for the weakest link. Because cryptocurrency is digital currency, it’s subject to hacking. As a real estate broker, you need to ensure your business is protected with comprehensive Cyber Liability insurance to help you deal with the latest cyber security risks.
Industry Regulation
The lack of regulation of the crypto industry brings with it some additional risks for real estate professionals. However, the U.S. Securities and Exchange Commission recently announced it will be tightening up regulations for crypto companies and digital assets in 2023. This is a step that has been welcomed by many, because it’s a significant move towards regulation of the industry.
Things Brokers Can Do to Minimize Risks When Dealing with Cryptocurrency
Keep Updated on Blockchain and Crypto Opportunities and Threats
Like any new developments in the industry, real estate brokers need to keep abreast of what is happening in the crypto markets. Blockchain technology and crypto payments have the ability to drive efficiencies in real estate transactions. Whether you’ve avoided it so far or you’re open and actively pursuing crypto opportunities, ongoing awareness of factors affecting the industry is key.
Establish a Crypto Policy for Your Brokerage
While some people prefer the crypto market because there is no influence of banks and financial institutions, it can also mean a lack of background and credit checks. The positives of no international transaction fees and bank wire fees can be outweighed by other risks. Transactions using cryptocurrency are difficult to trace, so if something goes sour, you and your clients may face a difficult legal situation. Brokers need to have policies in place to ensure that clients fully understand the risks of using cryptocurrency in a transaction. It’s recommended that clients be informed of the risks in writing.
Team Training and Education
Team training and education is important. Your team needs to understand the unpredictability of crypto markets and how this can influence a property transaction. They must understand how to approach a situation where crypto is offered as payment, so your brokerage isn’t vulnerable to a potential lawsuit.
Protect Your Real Estate Business
As a broker, real estate E&O Insurance and a Business Owner’s Policy are essential to protect your business. As part of one of the largest insurance brokers in the world, CRES has more E&O and other insurance options for real estate companies than just about anyone else. Let us find you the best protection for the best price.
Contact the team at CRES at 800-880-2747 for a confidential discussion today.
