This is the second of our 2-part series on blockchain technology, and its potential impact on the commercial real estate and the economy.
In part one of our series, we introduced you to the revolutionary technology that is poised to change how we conduct business and how our economy operates. Now, we take a closer look at how blockchain will specifically change the commercial real estate sector.
Buying Property Using Cryptocurrency
Once contracting engines have been created, property owners could create various forms of digital asset contracts similar to ICOs (Initial Coin Offering) in which you set the exchange rate or price of your property. Say you’re selling a property and you’re going to divide it into 10 million coins or tokens. You would then determine the value of each of those coins - let’s say $1 dollar each. Therefore, you may get multiple people buying portions of an asset. As an owner, you’re simply looking to collect the total asking price in cryptocurrency. In this case, it would be $10 million.
As mentioned in our introduction to blockchain, this technology increases fractionalization of commercial property. Cryptocurrency would make it possible for someone to pay a developer for as much, or as little, of a property as they wish. One of the advantages to this system is that it’s free and open for anyone to use. For many people, implementation of cryptocurrency may be their only chance to own commercial property.
“There’s no bank that’s going to say ‘no, you can’t borrow this amount of money because we don’t care to lend it to you,’” says Kierre Reeg of Nexus. “So, if you mine and work and have a little bit of money, your wallet will see a little bit of a minting rate - interest rate as we tend to think of it.”
Fractional Reserve and Lending
In cryptocurrency, there’s no fractional reserve. You have various mining and minting mechanisms such as "Proof of Work" and "Proof of Stake" (POW/POS). POW is basically bitcoin mining. In POW systems miners process transactions and secure the network in return for mining rewards.
POS is another form of a minting channel whereby a user's wallet and stock of coins is used to secure the market by forming consensus and in return receives a minting reward. We’ve come to think of POS systems as something akin to an interest rate, but it’s not – it’s actually a minting rate. Interest refers to the repayment of money owed for a debt. In this case, the money mints as equity in the system due to the “work” being done.
If we were to move away from fractional reserve the economy would shift from a "Money as Debt" model to a "Money as Equity" model. So this has massive potential implications for the real estate industry in terms of credit creation.
If our economic system becomes totally based on cryptocurrency, in its current incarnation, the system will be equity based and there’s only as much debt available as there is equity. But if we stay closer to a fractional reserve based system, then we’ll continue to see much more debt than equity in the system, keeping it more susceptible to financial crises and the interest rate mechanism will continue to drive money to money, similar to how gravity works. Reeg believes the downstream effects of "Money as Debt" leads to many of the challenges we face today with regard to overall debt loads and the current properties of wealth distribution that seem to be a sticking point for many people in society.
Reduction of Inefficiencies and Intermediaries
The commercial real estate transaction process can be long and inefficient. And that process involves brokers, lawyers, government officials, title companies, and so on and so on.
Blockchain technology offers the ability to reduce the inefficiencies and intermediation by cutting out, or drastically reducing the role of third party players. The fact that blocks of information containing title, deed, financial information, property attributes and performance, insurance, and so much more are now possible ensures that a shift in the industry will happen. However the timing and form of what is to come is not as clear.
The goal of blockchain transactions is to reduce the need for humans to process and verify an agreement. For example, some title information can currently be pulled from online resources, but in many smaller cities and counties, you have to go and pull physical documents from the recorder’s office, and a title company has to ensure that all of the correct documents and information is there.
“What blockchain and this technology represents, is the reduction of drudgery in the industry,” says Reeg. “These systems will reduce a lot of the tasks that have come be seen as repetitive monotony. Tasks and transactions will be significantly simplified, where all you’ll really need is a computer and internet access.”
Adoption of this technology
It’s important to consider whether counties will adopt this type of tech, because they are the ones that actually control what’s on the record for the properties.
Every county and state has different rules on transferring ownership, so it’s going to probably be local governments that are essentially adopting this technology. The question is, how long will that take?
It could very well be similar to the adoption of GIS (geographic information system) software. GIS is prevalent in roughly 90 percent of counties in the United States, but it’s taken a good 10 to 15 years to get there.
Additionally, one of the biggest questions is whether industries that could be negatively impacted by blockchain technology will work to adopt it or resist it.
There is potential pushback from title companies because this tech could hypothetically eliminate the need for title companies because you essentially wouldn’t need escrow any longer.
While there will still remain a need for some form of high level title, the costs will likely come down significantly for title insurance.
However, one positive for sectors such as title companies, is that there will likely always be some need for the human element. “Unless AI gets really good, you’ll still need a human to evaluate the risks and understand what the involved parties are actually trying to convey,” says Joshua Simon.
The commercial real estate landscape has the potential to vastly change over the next couple of decades. “Overall, this is the wave of the future. There’s no stopping it,” says Reeg. “It’s just a question of how it all comes together.”