How to Close Real Estate Transactions in Bitcoin & Crypto | Title Agents Podcast Ep66

In a world where change is the only constant, Mo Shamil stands at the forefront, guiding title professionals to not just grow their businesses, but to master the art of innovation. With every episode, you're handed the keys to unlock unparalleled growth and stay ahead of the curve. Get ready for a transformative journey. I've heard about crypto and real estate, mostly using some Bitcoin profits for a down payment, maybe bridging a gap, kind of dipping a toe in. Right.

That wasn't really changing the core process. Exactly. But the game, it seems, has fundamentally shifted. So today we're doing a deep dive into something much more complex, much higher stakes. We're talking full end-to-end real estate deals.

End-to-end, meaning the buyer pays entirely in crypto, Bitcoin, ETH, maybe USDC. And crucially, the seller can actually receive that crypto. No mandatory cash out to dollars halfway through. Yeah, that's the real leap. It's the next frontier, you could say.

And it absolutely requires specialized tech, specific platforms, and honestly, some pretty sophisticated legal navigation. So our sources suggest this is moving past just being novelty. It's becoming an operational reality. It is, though, that regulatory maze is. Well, it's incredibly challenging.

You mentioned using crypto for down payments that got pretty common. There was data back in 2021 suggesting what, over 12 percent of first-time buyers used it? Yeah, something like that. But this full crypto thing is a whole different level. Title, escrow, settlement.

Everything has to handle the digital asset directly. To finish. Absolutely. So our mission today is really to explore that roadmap. How are these platforms making these complex crypto closings actually happen safely, smartly?

And what are the regulatory hoops, the gauntlets that title and escrow companies have to run through to, well, not have things blow up? Right. Because failure here could be catastrophic. What's fascinating, I think, is just how quickly the tech solutions have matured. It wasn't long ago this was mostly theoretical.

And now we have actual licensed platforms doing it. We do. And looking at the industry, it seems like there are sort of two main paths emerging for these end-to-end deals. Two distinct approaches. OK.

Let's start with the one that seems maybe more digestible for regulators. The sort of compliant hybrid approach. Propy comes up a lot here. Yes. Propy is a great example.

What they're saying is they operate as a licensed U.S. title and escrow company. That's fundamental. They're not trying to bypass the existing system. Not at all.

They integrate with it. They use large institutional custodians, think Coinbase Prime or platforms like that, to hold the buyers crypto securely during that typical, say, 30-day closing period. So the buyer sends their Bitcoin or USDC to a specific wallet and it just sits there in escrow, managed by this custodian. Pretty much. OK.

And here's the bit that some see is really smart. Managing the volatility and the tax side. This podcast is brought to you by Struggling to set appointments and generate leads? What if you had a team working behind the scenes to help you book more meetings and close more deals? At Alltech National Title, our dedicated inside sales team help you find your pipeline so you can focus on what you do best, building relationships and closing business.

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Visit Alltechnationaltitle.com or DM us today to start the conversation. Why is holding the crypto until the very last second so appealing to a buyer? Oh, it's a huge deal. People call it the hodl factor, right? If you've got appreciated Bitcoin you want to use, well, under current IRS rules, selling it for dollars triggers a capital gains tax event immediately.

And if you have to sell weeks before closing to get cash into traditional escrow. You lock in that tax bill early, maybe before you even own the house. By holding it in crypto, Propy lets the seller decide at the final settlement, do they want the crypto itself or do they want USD? Ah, so the conversion is optional right at the end. Exactly.

It gives the seller flexibility. And for the buyer, they push that taxable event right to the moment the property actually transfers. And that's a big win for managing their portfolio. Okay. That makes sense.

That's the hybrid way. Yeah. Yeah. Working within the existing legal structure mostly. Right.

But then there's the other approach, the more radical one, completely redefining ownership with tokens. Roofstock on-chain. Yeah. This is a genuinely revolutionary shift. Roofstock on-chain uses NFT's non-fungible tokens.

But the NFT isn't the house itself exactly. The actual property is held inside an LLC, a limited liability company. The NFT basically functions like a digital share certificate for that LLC. And it's all tracked on the Ethereum blockchain. Okay.

Hang on. So if I buy one of these tokenized homes, I'm not technically buying the deed in the traditional sense. Correct. You're buying the ownership interest, the shares, essentially in the company that owns the home. Got it.

And the payment. That's where it gets really different. It's almost instant. to avoid price swings during the transaction. And no traditional escrow agent waiting weeks.

Nope. Smart contracts handle the closing. The code executes it. Once the payment is verified on the blockchain, the smart contract automatically instantaneously transfers the NFT and thus the LLC ownership to the buyer's wallet. Wow.

The blockchain transaction is the settlement. It collapses the whole process. The efficiency there is hard to argue with. Which leads right into the smart contract question. This is where it gets really interesting.

If the code is that fast, that efficient, are smart contracts actually required for these crypto closings? Or are they just, you know, a fancy feature for the cutting edge platforms? Well, the consensus we're seeing is that they're optional. Highly beneficial, yes, but optional, especially as an automation tool. So you can still do it the old fashioned way.

Sort of. You could. A buyer sends crypto to the title company's secure wallet. A human agent verifies everything, checks conditions, and then manually disperses the crypto at closing, just like they would wire fiat funds. But using a smart contract, that really changes the nature of escrow itself, doesn't it?

It does. It aims to remove the human element as a potential point of failure or fraud. The smart contract acts like a neutral third party, pure code. It only releases the funds when certain coded conditions are met digitally, like proof of title transfer. Exactly.

Things like that. It massively cuts down the risk of escrow fraud. You know, the classic scam with fake wire instructions. That risk evaporates because there are no wire instructions to fake. It's just a wallet address and an immutable transaction log on the blockchain.

That definitely sounds safer on paper. But are we just trading one risk for another human fraud for code risk? What if the smart contract has a bug? This podcast is made possible by our sponsor. You have worked so hard to build your business.

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And that's the million dollar question, isn't it? A vulnerability in that code, a flaw, an exploit. It could mean the total loss of funds. And crypto transactions are irreversible. No takebacks.

None. That's a major reason why the hybrid model, like Propy's, which uses crypto but still relies on licensed human oversight and traditional legal frameworks for the core transfer, is probably more favored right now for widespread regulated closings. So the radical tokenization model is faster, maybe cheaper. But carries higher inherent technical risk. For now, anyway.

Smart contracts are a powerful feature. Great for reducing certain types of fraud, but they aren't yet a legal mandate for transferring the actual property title itself in most places. Although some states are starting to recognize blockchain records. They are. Places like Arizona, Vermont, they're laying groundwork.

But it's early days for that being the legal standard nationwide. Okay. So we've got the tech, the different approaches. Now we have to face the music. The big hurdle, limiting mass adoption.

The regulatory gauntlet. When a title company decides, okay, we'll accept crypto, they instantly step into this world of overlapping, often confusing state and federal rules. It's not just more paperwork. It's a massive logistical and financial challenge. Title companies are already heavily regulated at the state level.

But the second they receive and transmit crypto for someone else, which is literally what escrow is. They risk being labeled a money transmitter. And that's where the patchwork nightmare begins, right? The 50 states all having their own rules. It's like trying to drive cross-country where every state line means learning new traffic signals.

That's a really good analogy, actually. You've got states like New York at one extreme with its BitLicense. paperwork. It's a massive logistical and financial challenge. Title companies are already heavily regulated at the state level.

But the second they receive and transmit crypto for someone else, which is literally what escrow is, they risk being labeled a money transmitter. And that's where the patchwork nightmare begins, right? The 50 states all having their own rules. It's like trying to drive cross country where every state line means learning new traffic signals. That's a really good analogy.

You've got states like New York at one extreme with its bit license, incredibly high bar, expensive, takes forever, very intrusive. Most firms won't even try. So if you want to handle crypto from a New York buyer, you basically need that license or you have to partner with someone who have it. Pretty much. But then you swing the other way.

You have states actively trying to attract crypto business. Like Wyoming. Right. Wyoming specifically exempted virtual currency from its money transmitter act altogether. Texas gave guidance suggesting that pure crypto to crypto deals where no dollars are involved directly in the transmission might not trigger their rules.

It creates huge uncertainty. And California is working on something new, too. Yes. The DFP is developing a digital financial assets law expected around 2025, which will almost certainly require some form of license for digital asset business activity, including escrow like functions. It's constantly shifting.

And floating above all this state level chaos is the federal government. INSA. Always the Financial Crimes Enforcement Network. FinCEN requires any business acting as a money services business, an MSB, to register federally. And critically, they have to implement robust anti money laundering programs.

AML. KYC, know your customer. All of it. So the safest play for any title company venturing into this. Treat every crypto escrow deal with the rigor of a major bank.

Intense due diligence. KYC transaction monitoring. OK, that's money transmission. What about this specific state escrow laws? That's another layer.

It is. Traditionally, escrow laws demand that client funds be held in a trust account at a bank, often an FDIC insured bank. But crypto isn't held at a bank by definition. Exactly. So how does a title firm meet its fiduciary duty, its legal obligation to protect client funds when those funds are sitting in a crypto wallet outside the traditional banking system?

Big question. Huge. Firms have to be incredibly transparent about how the crypto is held. Are they using secure cold storage, multi-signature wallets, an institutional custodian? And they often need specialized surety bonds or insurance policies that specifically cover crypto risks, theft, hacks, even potentially value fluctuations.

And you mentioned California earlier. They've explicitly warned about unlicensed cryptocurrency escrow sites popping up, too. Yes, you absolutely must be a properly licensed escrow agent in the relevant state to handle the real estate closing itself, regardless of the payment method. Makes sense. And within the actual purchase contract, clarity is king, especially with volatile assets like Bitcoin.

Oh, absolutely critical. This is where deals can fall apart if it's not crystal clear. Does the contract state the price as, say, exactly 10 Bitcoin? Or is the price fixed in U.S. dollars and the amount of crypto needed is calculated based on the exchange rate at the time of closing?

Which is more common. Overwhelmingly, the standard practice is pegging the price to USD. It protects both sides from wild crypto price swings between signing the contract and the actual closing day. Right. Avoid someone suddenly owing way more or receiving way less in real value terms.

Precisely. OK, final regulatory piece, the IRS tax reporting. This falls heavily on the closing agent, too, right? It does. The federal government is definitely watching these transactions.

The IRS actually broadened the legal definition of cash for reporting purposes to include digital assets specifically for that Form 8300. That's the one for reporting cash transactions over $10,000. Correct. Now, the specific enforcement date for crypto reporting on that particular form got delayed by the IRS in early 2024 guidance. But the writing is on the wall.

Closing agents need to be prepared for that requirement to kick in. And even without that specific form requirement being active right now, they still have other IRS duties like the 1099-S. Absolutely. The closing agent is generally responsible for filing Form 1099-S, reporting the gross proceeds from the sale. And they have to report that amount in its U.S.

dollar equivalent value at the time of closing. OK, but maybe the most important tax point, especially for you listening, is the buyer's own liability. Yes, this is crucial for buyers to understand. When you use appreciated crypto, Bitcoin, Ethereum, whatever, to buy property, the IRS views that as if you sold the crypto for its current fair market value at that moment. So you owe capital gains tax.

You owe capital gains tax on the difference between what you originally paid for the crypto and its value when you used it to buy the house. It's a separate taxable event from the property purchase itself. Buyers really need to talk to their tax advisor about this before the deal. Good advice. And all this ties back to the bigger concern about money laundering, doesn't it?

Crypto's potential anonymity. Makes due diligence on the source of funds more critical than ever. Real estate is already a known target for illicit finance. So title firms need strong KYC. Know your customer.

Absolutely. They need robust KYC procedures. They need to try and trace the crypto's origin, understand where it came from, and critically screen all the wallet addresses involved against government sanctions lists like the OFAC list. And FinCEN is signaling more scrutiny on all cash deals generally, including crypto. They've made it very clear they intend to tighten the regulations around all cash real estate transactions, and they explicitly include crypto in that category specifically to combat money laundering.

The bar for due diligence is only going up. OK, wow. This podcast is proudly sponsored by Need Extra Hands Without Extra Overhead? Meet Safi Virtual, your on-demand team of virtual assistants trained specifically for the title industry. Our VAs come with foundational knowledge of title insurance, ready to handle admin tasks, client communication, data entry, and more.

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What does all this mean for a title company or maybe even a buyer or seller thinking about this? We've seen the cool tech, the platforms, and the, frankly, terrifying compliance hurdles. Let's weigh the tradeoffs. OK. On the plus side, the big one is market access.

You open your doors to this rapidly growing pool of crypto rich individuals and funds. It's a whole new client base looking to diversify digital wealth into tangible assets. That's a big potential upside. And then there's speed efficiency. Huge advantage.

Settlement can happen in minutes, literally, compared to days for international wires. That's massive, especially for cross-border deals. And the blockchain provides this transparent audit trail. It can actually reduce certain risks, like the wire fraud we mentioned earlier. Right.

Hard to fake a blockchain transaction record. Very hard. And don't forget that hodl incentive we talked about, offering that flexibility on conversion timing and potentially better tax timing. That makes your service incredibly attractive to sophisticated crypto holders. OK, those are compelling pros.

But the cons, they seem pretty significant, too. Volatility is the obvious one. If a firm holds Bitcoin or Ether, even for a short time. They take on enormous fiduciary risk. What if the price crashes between receiving it and closing?

If the contract isn't absolutely airtight about who bears that risk, the title company could be on the hook for a massive shortfall. That sounds like a nightmare. It could be. And then there's the compliance burden. It's arguably the biggest drag right now.

The cost. The complexity. Needing specialized lawyers who understand crypto and state regulations across potentially dozens of states. Building out those complex AML and KYC systems, the cost can easily swamp the revenue you might make from the relatively small number of full crypto deals happening today. So it's an investment in the future, but an expensive one right now.

Definitely an investment. And then there's the technical risk. We touched on it, but it bears repeating. Custody risk. Losing the keys.

Sending to the wrong address. Exactly. Unlike a bank mistake you might reverse, a crypto mistake is usually final. Send funds to the wrong address. Private keys lost or stolen.

That money is gone forever. No FDIC insurance. No bank making you whole. That requires serious security. Institutional level stuff.

Absolutely. Multi-signature wallets. Rigorous cybersecurity training for staff. Audits. You can't afford a single careless typo.

The potential loss is catastrophic. Today's episode is sponsored by. Hey, you title agents. Stop wasting time digging for answers or waiting on an email or callback from your underwriter. With title GPT dot AI.

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Many sellers just want dollars. That's true. It's still niche. The number of deals where both buyer and seller want to transact purely in crypto is still relatively small compared to the overall market. And there's a human factor to the learning curve for clients, for staff, explaining wallets, confirmation times.

It takes significant handholding. So if we try to summarize the biggest risks, looking at the bigger picture, it really boils down to, I'd say, three things. Regulatory risk. adoption, it's still limited, right? Many sellers just want dollars.

That's true. It's still niche. The number of deals where both buyer and seller want to transact purely in crypto is still relatively small compared to the overall market. And there's a human factor too, the learning curve for clients, for staff, explaining wallets, confirmation times, it takes significant handholding. So if we try to summarize the biggest risks, looking at the bigger picture, it really boils down to, I'd say, three things.

Regulatory risk, the rules are changing constantly. Custody risk, if the keys are gone, the money's gone. And counterparty risk, you're relying on the security and stability of these third-party exchanges or custodian platforms. So careful due diligence, constant legal review. That's paramount.

Non-negotiable. I guess the challenge then is, given how complex this is, how risky, and maybe how few purely crypto-to-crypto deals there are right now, is this actually practical for most firms? Or is it just, you know, an expensive way to look innovative? I think right now, it is partly a competitive differentiator. It signals your forward thinking.

But the infrastructure being built, especially those hybrid solutions that blend crypto's speed and security with adherence to existing laws, that infrastructure is likely essential for the future. So it's about finding that balance. Exactly. Success means becoming both things at once. A traditional fiduciary, obsessed with protecting clients, and a cutting-edge fintech company embracing innovation.

You have to leverage the efficiency, the automation, the speed, while meticulously obeying the spirit and the letter of the existing financial regulations. So a company that really nails that security, transparency, compliance, they could genuinely position themselves as a leader here, unlock business that others can't touch. That's the opportunity, yes. That's the balance they have to strike. OK, so here's a final thought to leave you with.

We talked about FinCEN, how they're looking much more closely at all large cash-like transactions in real estate, including digital assets. Right. The scrutiny is increasing. So how quickly might this sophisticated infrastructure for crypto closings, which today seems may be optional, a tool for efficiency, how quickly could it become a necessary standard, not just for handling crypto deals, but for meeting tougher compliance and security demands across the entire industry, even for traditional transactions? That's interesting.

Will the tools built for crypto become the baseline for security everywhere? Something for you to mull over, perhaps explore on your own. Definitely food for thought. Well, we'll catch you on the next Deep Dive. And that's a wrap on today's journey with Mo Shamil from the Tidal Agents podcast, reminding you that mastering the art of innovation is key in the tidal industry's fast-paced world.

If you're finding it tough to keep up with the changes and challenges, remember, you're not alone. Our calendar is open for you. Find the link in the show notes and let's connect. Make sure to hit subscribe to not miss out on strategies that elevate and insights that empower. Together, we'll navigate the future of the industry.

I look forward to our next meeting in the upcoming episode.