How can cryptoassets be used to buy tangible property?

Cryptoassets are a group of digital assets stored and secured using distributed ledger technology (DLT). Traditionally, a ledger is “centralised” – in essence held as one master copy by a single entity but evidently vulnerable to loss, theft or tamper by a third party. Modern-day financial institutions have developed decentralised ledgers, held and maintained by a group of entities across multiple IT systems but not without vulnerability should the whole or significant parts of the IT system be compromised or suffer an outage.  DLTs use a whole network of computers (or “nodes”) to propagate and update the ledger. Bitcoin, for example, bundles transactions into “blocks” which are added to the blockchain. The blockchain is a public record of every Bitcoin transaction that has ever taken place and attenuates any risk of an attack by delegating control and maintenance of the ledger equally among every node. Types of cryptoasset Cryptoassets are divided into subgroups: cryptocurrencies, exchange tokens, utility tokens, security tokens, stablecoins and non-fungible tokens.  The primary cryptoassets that may be encountered alongside traditional assets are exchange tokens and stablecoins. Cryptocurrencies (which are technically tokens), such as Bitcoin and Etherium, are primarily used as a method of payment and are perhaps the most common cryptoassets invested in. They operate as a digital store of value or currency and, in some cases, can be transferred between individuals instantaneously without the use of a financial intermediary. Stablecoins, such as USDT, are tethered to the price of a fiat currency, commodities or other virtual assets. They aim to stabilise the cryptocurrency markets and are used by those who want the security, speed and privacy of DLT without the erratic variations in the value of exchange tokens.  Given that cryptoassets are a relatively young form of finance, they are not at present widely accepted in day-to-day life. However, they are hardly rare these days, and in the past few years a craze for all things “crypto” has gripped the world – to the extent that some forms, such as Bitcoin, have achieved mainstream popularity. It is thanks to this journey that cryptoassets have, to some extent, become aligned with traditional tangible assets, meaning that we are ever more likely to encounter this new form of finance in all avenues. Perhaps the most common by-product of their popularity is the overlap between cryptoassets and traditional tangible assets, particularly how wealth in the former is realised to fund the latter and the associated issues that this can cause.  Here, we will try to cover some of the most common questions we see arising out of the interlink between the two in relation to funding property transactions. How do cryptoassets interlink with tangible assets? With an ever-increasing number of people investing in cryptoassets, more and more people are holding significant portions of their wealth via these formats. Similar to shares, premium bonds and precious metals, cryptoassets are becoming an increasingly popular mechanism for investment – one which can be extremely lucrative, not only for those who “know what they are doing”, but also for speculative investors with little to no experience who may have simply become involved owing to hype. As with any investment/holding of funds, we often see people realising their gains/releasing funds to assist with the purchase of tangible goods and, in particular, we increasingly encounter prospective property purchasers looking to use funds held in forms of cryptoassets to fund real estate transactions.  Pursuant to Law Society and Solicitors Regulation Authority requirements, and in compliance with anti-money laundering regulations, law firms involved in such transactional work must conduct routine and stringent compliance checks on all clients to satisfy their legal duty to ensure that all funds used are derived from a legitimate source. Increasingly, we are seeing clients’ source of funds being derived, whether in part or in whole, from cryptoassets/previous crypto gains.  Can I use cryptoassets to form all or part of my purchase funds? While at present it is unlikely you would be able to use a cryptoasset itself as a form of payment for a house purchase, it is possible to use profits/monies derived from it. Commonly, this is done by holders converting their cryptoasset into sterling prior to entering into a transaction and therefore using the legal tender as converted. This, in theory, is absolutely acceptable, so long as the source of the realised funds can be traced. A comprehensive document trail evidencing the initial investment, the associated gain (if any) and thereafter the sale/reconversion is essential here in order to establish that the funds being used are perfectly legitimate.  In practice, however, the answer is much more complex. While ever growing in popularity, a hesitancy to deal with funds derived from such sources still persists, and it certainly isn’t uncommon for prospective purchasers to encounter difficulty in retaining firms to act under such circumstances. While this may not be sustainable in the long term, a number of firms continue to have policies in place to effectively embargo potential new clients wishing to utilise cryptoassets as part of their source of funds.  Will a lender accept deposit monies derived from cryptoassets? This is a particularly topical point, and it is often the most common stumbling block faced by purchasers when using monies derived from cryptoassets while also requiring a mortgage. By their very nature, lenders – particularly the high street banks we all think of when considering a mortgage – are risk averse. Many of these providers will simply turn customers away outright if their mortgage deposit is made up of cryptoasset profits, since they will be wary of funds that aren’t necessarily easily traceable. Similarly, lenders often don’t accept cryptoassets as declarable income for their affordability checks owing to the volatility and associated difficulty in assessing risk. This isn’t always the case, however, and there are now a handful of lenders (of which the number is ever increasing) that will consider such circumstances.  Although the chances of rejection can be high if you head out into the market without professional guidance, there are specialist mortgage brokers who can provide assistance in such circumstances. An adviser who specialises in cryptoasset-based deposits can prove invaluable and can assist in narrowing down the list of lenders and match you with a provider suitable to your specific circumstances.  Will I incur any further fees or will anybody else need to be involved? Potentially. This will be determined on a firm-by-firm and case-by-case basis. Given the additional work often required in reviewing complex source of funds returns, it is not uncommon for firms to charge supplementary amounts to reflect the additional time costs spent on such matters.  Additionally, one approach we are seeing become increasingly common is where the law firm acting involves the services of a forensic accountant/forensic analysis firm to review and approve the legitimacy of funds. While this does increase costs, by way of engaging a further professional, it can be an extremely efficient way of managing such transactions. Increasingly, we are seeing appropriately qualified and experienced professionals branching out into this niche growing market and partnering with law firms to offer this service. On the ground, this can often prove to be one of the most efficient ways of dealing with such a matter, and it has the double benefit of providing the law firm with piece of mind while also quickening the process for the purchaser.  Will using cryptoassets to fund all or part of my purchase delay the process? The key here is research and preparation. Given the complex nature of such matters, purchasers should firstly recognise the unique circumstances of their matter and should therefore prepare accordingly before jumping into the process, expecting that the often-complex nature of their funds may mean extra steps are needed in order to satisfy regulatory requirements.  In order to mitigate delays, purchasers should ensure they have the most comprehensive and up-to-date audit trail available from the outset. Time should also be spent researching appropriate and experienced professionals to assist with the process who have a clear history of dealing with such transactions.  The future  The main obstacle at present is that cryptoassets are a relatively young form of finance and are still misunderstood by many. Although growing in popularity and becoming increasingly familiar in day-to-day life (we now have crypto-related companies sponsoring football teams and advertising on TV, etc), they still haven’t managed to completely lose their association with links to criminal activity and tax evasion. From a lender’s perspective, the main issue seems to stem from the unstable nature of cryptoassets, and so how stable the market ends up being over time will more than likely determine whether lenders become more willing to accept such circumstances – especially with regard to declaring income derived from crypto on a mortgage application.  For now, the traditional way of buying with sterling derived from standard forms, such as savings from employment, is king. However, if cryptoassets continue to grow at the rate they have over the past decade or so, this will need to change, with firms needing to adapt and modernise traditional processes to cater for the ever-increasing commonality. Those who don’t are at risk of being left behind. Adam McDonald is a solicitor in real estate (investment and property management) and Adam Stanley is a trainee solicitor in corporate at Brabners Image © Jievani Weerasinghe/Unsplash