Asian Property Review examines whether it is prudent to transact real estate in bitcoin. Text by Jan Yong
On January 9 this year, it was reported that a Sabahan businessman sold his 1.22ha of land on an island for half a bitcoin (equivalent to RM38, 000 at the time). Payment was made by transferring the bitcoin via their Luno wallets. Luno is a Singapore-incorporated bitcoin platform where people can buy, sell and trade bitcoins.
The sale price was quoted in both ringgit and bitcoin value. Malaysia’s Central Bank (Bank Negara) has said bitcoin is not legal tender but has not banned it outright. As such, Malaysians can still trade in bitcoin exchanges and if parties to a deal agree, they could use bitcoin as the primary or alternative payment method.
Since private contracts are on a willing buyer, willing seller basis, parties to a contract including the sale of land or property can agree to whatever terms they like including the type of currency as long as it is not illegal. There is nothing in the laws of Malaysia as yet that prohibits the sale of property in a currency other than the ringgit; this is likely because this problem has never been encountered before. It has always been assumed that property would be paid for in a currency denominated in ringgit.
Four days following the landmark deal, the Inland Revenue Department (IRD) froze Luno’s account and requested for details of all of its customers and their transactions.
Earlier, in December 2017, Bank Negara had proposed draft regulations for digital currency activities, in particular, Know Your Customer (KYC) and Anti-Money Laundering (AML) guidelines in an attempt to provide more transparency to an industry where the anonymous nature of its transactions facilitate money-laundering, terrorism financing and tax evasion.
What happened in Malaysia is symptomatic of the dilemma faced by regulatory authorities all over the world when dealing with the new cryptocurrency revolution. 2017 was the ‘Year of the Cryptocurrency’ which saw the value of cryptocurrencies skyrocket and the creation of new ones. Imagine a 1,700% return in about 11 months’ time!
While some countries have embraced it, for example, Japan and the state of Arizona in the US, both of which hope to be the hub of the digital currency revolution, there are others such as China, India and South Korea which have clamped down hard on cryptocurrencies. China is said to be working on blocking all on-shore and off-shore platforms related to cryptocurrency trading ICOs in an attempt to quash the market completely. Likewise for India which plans to eliminate cryptocurrencies altogether from its payments system. South Korea meanwhile, has banned anonymous transactions.
Some countries like Malaysia, Vietnam, Indonesia and the Philippines are taking the middle path by coming up in the near future with draft legislations to regulate the industry without totally banning the virtual currency.
More developed financial centres like Hong Kong and Singapore are fine-tuning their laws – Hong Kong and Singapore deem some forms of cryptocurrency as securities to be regulated and subject to various disclosure, licensing and other laws.
Following the massive Coincheck theft, Japan is now ensuring stricter monitoring of cryptocurrency exchanges. It is also creating a database of cryptocurrency investors to ensure enforcement of its tax laws which impose taxes of between 15 and 55% on their virtual currency profits.
There are extremely divergent views on its long-term potential – some think bitcoin will eventually be the gold standard for digital currencies and may reach the dizzying price of USD100, 000 per bitcoin. Others contend that the value of all cryptocurrencies will nosedive to zero and will eventually disappear given its lack of intrinsic value and practical applications other than as a means of payment. In January 2018, the plunge in bitcoin value has many proclaiming that the bitcoin bubble has finally burst.
Prior to that, due to its surge in value to about USD20, 000 per coin at its height in 2017, some in the property industry decided to use it instead of fiat currency.
A few developers in Dubai, followed by Turkey announced that buyers can purchase their properties using bitcoin. In the US too, an excited agent raved about a real estate transaction that he claimed took only 10 minutes for the bitcoin to be changed to US dollars.
In London, a house owner was willing to accept bitcoin as payment while a co-living realtor was accepting rental payment in bitcoin.
Its excessive volatility is what makes bitcoin totally unsuitable for real estate transactions, says a realtor in Malaysia. Imagine the value of your house skyrocketing or plunging in a matter of days!
Furthermore, transactions in Bitcoin are slow because its network can only process a few transactions per second. Compare that to Visa or Mastercard, which can reportedly process 24,000 transactions per second – nearly 10,000 times more. Transaction costs are also very high.
Then there is the danger of theft of bitcoin wallets as had happened to Coincheck in Tokyo in January where a mindblowing 46.3 billion yen (US$425 million) was stolen when the exchange was hacked. Although the exchange owners had promised to return all the money to its customers, there was no timeframe set. And what if a bitcoin exchange suddenly closes down?
While the underlying technology of cryptocurrency, blockchain, is great and is the basis of the trust in cryptocurrency (blockchain is decentralised with many computers around the world recording a transaction), it is still not backed by a trusted entity as is the case of fiat money which is backed by governments.
Therefore, when it comes to property, it is recommended that buyers and sellers refrain for the time being from using bitcoin as a payment currency.
However, in the case of deferred purchase or rent-to-buy where the buyer rents first with an option to purchase a few years later, the contract can fix the price in both the fiat currency and the equivalent value in bitcoin. To resolve the issue of volatility, it would be prudent to introduce a clause stating that should the bitcoin value diverges by say, 10% in either direction of the price stated in fiat currency, then the parties must transact in the fiat money.