Bitcoin and other cryptocurrencies like Ethereum and Litecoin have witnessed an unprecedented growth in media-related attention.
This went along with the sextupling of the Bitcoin`s exchange rate in US-Dollar since the beginning of 2017.
Substantial price gains and a spreading utilisation of cryptocurrencies thereby nurture the user`s natural desire to utilise their virtual money for the acquisition of tangible assets like precious metals or real estate.
Virtual to Real
Aston Development, part of a group hailing from the UK, jumped the bandwagon in September 2017 by launching its off plan development dubbed „Aston Plaza & Residences“ which is projected for completion in 2019. On their website the developer offers the purchase of 1- to 3-bedroom units instantaneously by transfer of bitcoin currency.
For the execution of the payment process Aston has chosen payment provider Bitpay which practically leads to the US-Dollar billed unit price being converted into valid Bitcoin pricing based on the presently valid conversion rate.
Although stirring some resentment within the Bitcoin community, this approach is somewhat comprehensible from a developer`s perspective trying to retain planning reliability by avoiding exposure to high currency fluctuations.
From an objective point of view and focusing on costs, it has to be stressed that using a credit card would bear an estimated cost of around 2% for the purchase while Bitpay demands a total fee of 1% for the otherwise identical transaction.
It is not the scope of this article to assess the quality or yield prospects of the mentioned property offering. Rather, my objective is to depict and assess the status quo as well as the probable future development for the usage of bitcoin and comparable cryptocurrencies for the purchase and management of real estate within the Emirate of Dubai.
The said off plan proposition is, at least within Dubai, the first of its kind, although rumour has it that a number of property owners in Dubai`s „Citywalk“ community are already finding counterparts for their offering to rent their apartments against Bitcoin payment.
Innovation Driver Blockchain
Already at an early stage Dubai has recognised the potential that blockchain technology holds, giving birth to its „Dubai Blockchain Strategy“ in 2016 which is to lift all administrative and government processes into the blockchain by 2020. Furthermore, the emirate is confident to provide a host of industries like fintech, banking, real estate, e-commerce, tourism as well as healthcare with a further boost by leveraging this technology.
Considering the fact that Dubai keenly fosters blockchain-based technologies and is composed of a young population with an above-average technology affinity, it is likely that the applications brought about by this revolution will see a rapid adoption by its user audience.
That said, the advance of payment systems based on cryptocurrencies is only part of this change. At least equally disruptive effects are to be expected for practically all processes that are linked to acquisition and management of real estate assets.
In January 2017, the UAE`s Central Bank enacted a new financial regulation by which it allegedly declared virtual currencies and any transactions executed using such means of payment as illegal. A statement was made shortly after, clarifying that „virtual currency, which is defined as any type of digital unit used as a medium of exchange, a unit of account, or a form of stored value“ was not subject to the beforementioned regulation.
This made clear that the earlier ban would only be applied to so-called Initial Coin Offerings (ICOs) which were seen as a potential means of dubious fund raising, therefore prompting the regulator to curb such activities, while announcing a subsequent detailed regulation to come into effect at a later stage.
Based on the initial formula of the Central Bank`s communication it has been and is still wrongly reported that ownership of bitcoin and other cryptocurrencies and their trade and utilisation was illegal in the UAE.
It becomes obvious that the UAE Central Bank – in good company with the American SEC and other financial regulators – is struggling to appropriately define and delimit regulated and non-regulated activities and usages of blockchain technology.
However, considering the progressiveness with which the UAE are generally embracing blockchain-based innovations, I have great doubts that a subsequent U-turn in the form of an attempted ban on digital currency could possibly arise.
Crypto Quo Vadis
Even if one is to object to the regularly-cited point of criticism, cryptocurrencies had no intrinsic value – or much rather to consider this apparent characteristic as a similarity to fiat money: In consideration of overwhelming profits vis-a-vis fiat money and a continuously high volatility it seems more than comprehensible that a growing number of cryptocoin investors are contemplating to cash-in by (partially) exchanging cryptocurrencies for hard assets like shares in companies, precious metals or real estate.
In analogy to hard cash it has been frequently assumed or insinuated that intensive trade or storage of value through crypto-based currencies was being conducted predominantly by dubious individuals. Considering that Bitcoin and others have significantly gained in value and user adoption and against the background of the apparent and escalating abuse of the money generation monopoly by some central banks (i.e. by conducting concealed government financing and financial repression), this allegation appears increasingly untenable.
Moreover, cryptocurrency exchanges acting as gatekeepers between the traditional and „virtual“ monetary system are regularly subjected to similar anti-money-laundering measures as conventional financial institutions.
That said, in a situation where substantial amounts of Euro or US-Dollar are exchanged against cryptocurrency, the oftentimes critizised, supposedly inherent anonymity of such a transaction is nothing but a chimaera.
Personally, I have little doubts that the majority of buyers of virtual currencies consider them as the more robust form of currency and store of value in comparison to fiat money. Furthermore, a large proportion of users deem cryptocurrency to be an adequate vehicle to successfully counter any potential governmental expropriation initiatives – whether in the subtle variant of inflation or the blatant form of a monetary reform.
In consideration of the above it only appears stringent that an investor switching from virtual to hard assets would prefer investment forms allowing ongoing proceeds as well as those stemming from alienation of the asset be collected in cryptocurrency.
In light of the fact that technological innovations typically undergo a rapid adoption in Dubai it appears highly likely that a substantial part of purchasers and tenants looking to benefit from lower transaction costs and fees will use cryptocurrencies for buying and renting properties only in a few years from now. Further, I assume that new payment providers will facilitate the seamless transition between fiat and numerous cryptocurrencies.
One thing, however, is certain: Blockchain technology and smart contracts will be taken advantage of in practically all of Dubai`s governmental administration including the official land registry (Dubai Land Department) and other public bodies and private companies within Dubai`s real estate sector.
This revolutionary transition will bring about a host of improvements including, but not limited to the possibility to perform title transactions independently of location.
Although the anonymity of the parties to property transactions is not feasible by nature, the retransmission of values into cryptocurrencies can indeed be justified through the concept-immanent protection against capital controls, confiscation or other sanctions.
Within the segment of off plan properties, I expect all reputable developers to offer the purchase of property units by means of cryptocurrencies within a short to medium term. Besides, resourceful real estate agents will focus on offering and mediating real estate transactions against payment through Bitcoin and the like.
Finally, market-listed Real Estate Investment Trusts (REITs) – a sector that is rapidly evolving within the UAE – will leverage blockchain technology for facilitating acquisition and trade of shares in such schemes.
Considering the topicality and relevance of the subject notably for Dubai`s real estate sector, I will continue to monitor further developments and cover them in this blog.
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The author advises institutional investors about property transactions and handles property portfolios in Dubai since the year 2007. Should you have comments or inquiries, please contact the author on firstname.lastname@example.org