What’s in your wallet?

How to advise clients on property investment with cryptocurrency in the UK

Following breathless reports in the past year of increasing numbers of cryptocurrency millionaires looking to diversify their portfolios with investment in real estate, we consider some of the hurdles facing buyers looking to purchase UK real estate with cryptocurrency.

The potential for blockchain technology to revolutionise conveyancing transactions with speed and efficiency is compelling, particularly the scope for both domestic and cross-border transactions. However the lack of current regulatory guidance for law firms, banks and financial institutions and limited precedent transactions mean that the use of cryptocurrency is considered to be high-risk.

Earlier this summer a buyer paid for a $22.5 million Miami Beach penthouse using cryptocurrency and property investor and developer Nick Candy recently confirmed that he will accept Bitcoin and Ethereum (another leading virtual currency) from prospective purchasers for the penthouse apartment at One Hyde Park (asking price £175 million). It may be that we are at the dawn of a new era of cryptocurrency transactions.

There are two possibilities for buyers wanting to use cryptocurrency profits to invest in UK real estate:

1. an ‘all-cryptocurrency’ transaction where the purchaser transfers the cryptocurrency payment from his/her digital wallet to the vendor or their representatives’ digital wallet; or
2. a ‘cryptocurrency to sterling’ transaction where the buyer exchanges their cryptocurrency for traditional fiat currency and completes by paying the vendor in sterling (in the UK).

Agreement with the seller

The first hurdle a buyer will face is whether the seller is willing and able to complete an all-cryptocurrency transaction. Currently the key risks of these transactions – the difficulty in conducting satisfactory anti-money laundering checks, the price volatility and risk of default by a buyer – mean that this form of transaction is still relatively rare. Although we would always recommend that buyers conduct proper legal due diligence on the property to be acquired, an all-cryptocurrency transaction may have the effect of excluding law firms, banks and financial institutions from the conveyancing process. Whether sellers are willing to take on the burden of conducting due diligence on the purchaser and the source of their funds remains to be seen. In our view a cryptocurrency to sterling transaction enables the prospective purchaser to access a far wider range of potential transactions as the advantage for the vendor is the well-trodden route of traditional conveyancing.

Anti-money laundering due diligence checks

The second hurdle for a purchaser is satisfying the anti-money laundering requirements for real estate transactions and in particular providing evidence of the source of funds for the transaction. The Solicitors Regulation Authority states that:

‘Any use of cryptocurrencies should be regarded as being high risk because they facilitate anonymity and the origin of the funding is likely to be obscured’.

As an all-cryptocurrency transaction would not involve a bank or financial institution the seller and their legal representatives would need to conduct the necessary checks to establish that the ‘title’ to the purchaser’s cryptocurrency wallet is clean and that the purchaser’s name does not appear on any of the current sanction lists. There is an emerging market for third party due diligence and compliance solutions in the United States and we expect that will occur in the UK too. For purchasers wishing to exchange their cryptocurrency to traditional fiat currency it is necessary to provide satisfactory evidence to a bank or law firm of the origin of these funds.

From January 2020 UK crypto asset exchange and custodian wallet providers fall within the scope of the Money Laundering and Terrorist Financing Regulations. The UK government is in the process of preparing guidance for firms on how to undertake source of funds checks and assess the risk of crypto transactions more generally. This would require firms to ‘obtain, hold and transmit identifying information of both parties in any cryptoasset transaction’. Pending implementation some banks, law firms and financial institutions have their own customer onboarding regimes, investigatory monitoring systems and customer databases. Some firms also use crypto-forensic services in order to detect criminal abuse. Given the lack of a standard set of requirements both domestically and internationally, buyers with cryptocurrency may experience a certain amount of cost, difficulty and delay in satisfying the requirements as the regulatory regime evolves.

Price volatility and the risk of default

The price volatility of cryptocurrency is well-documented and caution is required in ensuring that the value of the cryptocurrency enables the buyer to complete the transaction at the agreed price. Sellers will be wary of the risk of default by the buyer with all-cryptocurrency transactions and it is likely that there will remain a preference for traditional fiat currency in this regard.