LEGAL CORNER: Where Do Cryptocurrency, Blockchain Technology And the Metaverse Stand in the R.E. Industry in 2023?
John Dolgetta, Esq. | February 7, 2023
In early 2023, it is clear that cryptocurrency, blockchain technology and the metaverse are on track for a significant recovery. In 2020 and 2021, increased interest in blockchain technology and significant investment in cryptocurrency and the metaverse became a major focal point for companies and investors alike. Throughout 2022, however, we witnessed what has been termed an extreme “crypto winter.”
With the fall of FTX in late 2022, as well as other companies in the crypto space, the belief of investors, both retail investors (i.e., individual investors) and professionals is that investment in cryptocurrency, and in companies that utilize its underlying blockchain technology for a variety of projects as a viable investment vehicle, was shaken to its core. Many pundits have called cryptocurrency a Ponzi scheme, a scam, and have called for its total collapse altogether. Many believe that it cannot be regulated and should not even be permitted to exist.
Remembering the 2008 Financial Crisis
Before everyone simply throws out the proverbial “baby with the bath water,” one should take a step back. It is easily forgotten that the 2008 financial crisis involved the collapse and bailout of some of the largest financial institutions and insurance companies in the nation and the world. These institutions were subject to some of the strictest regulations, and yet the entire financial system nearly suffered a total collapse.
Some of these companies included the biggest names in the financial and insurance sectors, like Lehman Brothers, which filed for bankruptcy in 2008, as well as AIG, which was near oblivion and survived only as a result of billions in government bailout aid, just to name a few. Fannie Mae and Freddie Mac had to be basically nationalized and be run by the government. The term “too big to fail” was coined and became a well-known theme throughout the crisis. The entire financial system was saved only because the federal government, as well as other governments throughout the world, provided trillions upon trillions of dollars in bailouts to companies that were extremely overleveraged and which took extraordinary risks with funds belonging to investors and individuals.
The Collapse of FTX and Other Exchanges in 2022
On Nov. 11, 2022, FTX, one of the largest cryptocurrency exchanges in the world, filed for bankruptcy. Sam Bankman-Fried, the CEO and founder of FTX, was arrested on Dec.12, 2022, in the Bahamas and then extradited to the United States. He was charged with wire fraud and conspiracy to defraud customers. Sam Bankman-Fried was worth nearly $38 billion in early 2022 and lost nearly all of that wealth by November. Investors in FTX have lost billions of dollars, and according to NerdWallet, “the exchange owes its top 50 creditors almost $3.1 billion combined, with almost over half of that amount ($1.45 billion) owed to just the top 10.” [See https://bit.ly/3wXVLuQ]. Tens of billions of dollars were lost by the remaining investors.
In 2022, as reported by Cointelegraph, there were a number of other high-profile collapses and bankruptcy filings that occurred throughout the year in the crypto space. Some of these include the following: the hack of Axie Infinity’s Ronin Network bridge (where $3 billion was initially stolen); the TerraUSD Luna collapse (where investors lost approximately $60 billion); the Three Arrows collapse (where $650 million was lost); the Voyager Digital collapse (where the company filed for bankruptcy and owes between $1 billion to $10 billion to debtors); the Celsius crash (where the company filed for bankruptcy having $6.6 billion in liabilities with only $3.8 billion in assets); and the BlockFi collapse and bankruptcy. [See https://bit.ly/3RxU5l0].
It is easy to see why there was a “crypto winter” in 2022. Any one of these collapses should have brought the entire crypto market to its knees and, while there were significant losses on a percentage basis in most, if not all, cryptocurrencies in 2022, since January 1st, the entire crypto market has been on a bull run. Many cryptocurrencies and token prices, and stock prices of cryptocurrency exchanges, like Coinbase and Robinhood, have appreciated by double and triple digits on a percentage basis. In stark contrast to the 2008 financial crisis, the crypto market has been able to stabilize over the past several weeks without any government assistance, and while there have been significant losses in the space, the crypto market was able to weather the storm on its own.
The Promise of Blockchain Technology and the Crypto Market
One reason why the crypto market may have stabilized is because of the underlying technology that make cryptocurrencies viable, as well as the metaverse, and that is blockchain technology. Cryptocurrency and the metaverse, in their basic forms, are made possible through the use of blockchain technology.
What Is Blockchain?
According to IBM, “blockchain” is defined as “a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.” IBM further points out that “a blockchain network can track orders, payments, accounts, production and much more.” Rather than simply call for the abolition of cryptocurrencies, tokens, and the metaverse, the focus should be on passing reasonable regulations. Blockchain technology is here to stay and will inevitably have an important role in many industries.
Still a Nascent Market and Technology
Cryptocurrency, the metaverse and blockchain technology are still in their infancy. Investments in cryptocurrency and the metaverse will undoubtedly become more widespread. The use of blockchain technology will become a critical component of all industries, including the real estate industry. For example, Facebook, which changed its name to Meta, has made significant investments in developing the metaverse and many companies will certainly follow.
Buying, Selling and Utilizing Real Estate in the Metaverse
In December, Inman reported that The Agency Turks and Caicos, a luxury real estate franchise, opened its first fully virtual office in the virtual world of Decentraland [visit https://decentraland.org]. [See https://bit.ly/3Gr5ZZ5]. Decentraland is one of the first fully decentralized virtual worlds which operates through what is called a Decentralized Autonomous Organization (DAO). Through the DAO, individuals are able to vote and can “control the policies created to determine how the world behaves: for example, what kinds of wearable items are allowed (or disallowed) after the launch of the DAO, moderation of content, LAND policy and auctions, among others.”
Decentraland also has its own virtual currency (i.e., ERC-20 token) known as MANA, which is used to pay for land in Decentraland. ERC-20 is the technical standard for fungible tokens created using the Ethereum blockchain, which is one of the most widely-utilized blockchains in the crypto space. Since the beginning of the year, the price of the MANA token has risen more than 130%. In the same time frame, Ethereum’s price has risen more than 30% and Bitcoin has risen over 35%.
The Agency Turks and Caicos’ virtual office is the first brokerage-wide office that has been developed and opened to operate solely in the metaverse. The managing director, Sean O’Neill, told Inman that “the metaverse office will also serve as a place for agents to meet for training programs, and ultimately, office events…” and indicated “that they’re just beginning to tap into the possibilities for the office in the future.” While many may have serious reservations about pursuing investments in cryptocurrency, utilizing blockchain technology, or pursuing investments in the metaverse—the possibilities are endless.
Buying Land in the Metaverse Utilizing Non-Fungible Tokens
According to Inman, “the metaverse will be the next Internet, or Web 3.0 as it’s called, but space will be limited—just like real estate on land. So, people are jumping in headfirst to buy space in the metaverse and crossing their fingers that it’ll be a hotspot to make money in the future.” [See https://bit.ly/3RwTfVV]. Real estate in the metaverse will be represented as a non-fungible token or NFT. Inman explains that a “non-fungible token, is built using the same programming as cryptocurrency, like Bitcoin. NFTs cannot be traded, exchanged, or replicated. They can represent real-world items, like real estate. Having the token reduces the probability of fraud because the token proves ownership.” In February 2022, virtual islands in The Sandbox, a game in the metaverse [see https://bit.ly/3wVPboz], sold for $2.9 million. Inman points out that virtual land located next to parcels owned by celebrities, such as Snoop Dog and others, can fetch a hefty premium. The Sandbox native cryptocurrency token (SAND) has also appreciated nearly 70% over the last month.
Using Blockchain Technology For R.E. Transfers, Title Insurance
In 2021, talk of utilizing blockchain technology and cryptocurrencies for real estate transactions and title insurance purposes became more and more popular. The Real Deal explained that “one obvious way for [blockchain] to be used is to help make it easier for property owners to record and transfer legal ownership of their real estate, something that is known as title.” [See https://bit.ly/3YsF0n1]. Inman indicated that since the title process is itself an inefficient process based on title searches and deed recordings handled by individuals, that “it seems like a perfect problem for the mighty blockchain technology to solve.” Inman points out that while many pilot projects were discussed by municipalities, in particular, relating to recording of deeds, mortgages, etc., many of these initiatives never went anywhere. There have also been some instances where cryptocurrency was used as a payment method in real estate transactions over the past few years, but the crypto winter, and volatility in cryptocurrency prices, have undoubtedly had a chilling effect on the advancement of utilizing blockchain technology and cryptocurrency payments in real estate.
Blockchain Technology, the Metaverse And Cryptocurrency is Here to Stay
As much as it may have seemed that the end was near, it is clear that blockchain technology, cryptocurrencies and the metaverse are here to stay. Each of these can ultimately be utilized in a variety of ways, such as recording deeds, issuing title policies, lending, purchasing and showing property (in both virtual and non-virtual worlds), gaming, investing, conducting business on a worldwide basis using the metaverse and cryptocurrencies, and implementing new, secured forms of payment systems in worldwide commerce (which can also limit cybersecurity fraud and theft issues).
As is common with all emerging markets and technologies, it takes time for adoption, adaption, and ultimately, implementation. As one may recall, in 1998 there was the infamous bursting of the tech and Internet bubble. Billions of dollars were lost on investment in speculative Internet companies. Yet, nearly 25 years later, some of the largest and most influential technology companies (e.g., Apple, Amazon, Priceline, and many more) rose from the ashes to lead the world into new uncharted territories. One could even argue that it was not until recent events with the COVID-19 pandemic that the Internet economy really hit the next level. While everyone should be extremely careful when investing in these cryptocurrencies, tokens, NFTs and the like, as there is certainly high risk and volatility, it does not mean that the entire crypto and blockchain space should be discarded or ignored.