Bitcoin and other cryptocurrencies have been making headlines in recent times. In 2017, the value of Bitcoin soared exponentially. Despite being a highly volatile asset, digital currencies are gradually becoming more widely accepted as legitimate forms of payment in financial and banking markets around the world. With the hype around cryptocurrency showing little sign of slowing, will Bitcoin soon become an accepted form of payment in property transactions?
Bitcoin is an online digital ‘cryptocurrency’. It is a digital asset existing in a decentralised online system that uses a public ledger (a ‘blockchain’) and encryption to regulate ownership. If you own Bitcoin, what you control is digital key used to prove to anyone else in the system that you own a certain amount of Bitcoin.
Bitcoin is a finite asset, comparable to a monetary asset like gold. The Bitcoin protocol was designed so there will only ever be 21 million Bitcoins in existence. Unlike fiat money (money declared by a government to be legal tender), new Bitcoins cannot be created on a whim. Instead they must be ‘mined’ by computers solving increasingly complex equations in order to release further Bitcoins into circulation. Like gold, as more Bitcoins are mined it becomes more and more difficult to access new Bitcoins. As the demand for Bitcoin increases, so too does its value.
Bitcoin is utilised as an investment, a currency that that can be traded in, and increasingly as a form of payment accepted by service providers. It is only recently that Bitcoin has been considered as an alternative form of payment in property transactions.
Using Bitcoin to purchase real property in Australia
It is becoming less of a rare sight to see online property listings with prices expressed in Bitcoins or stating that Bitcoins are an accepted form of payment.
The volatility of Bitcoin, however, is one of the main deterrents to using it to sell and buy property. Given the scale of a purchase of real estate, the daily fluctuations in the value of Bitcoin mean that the asking price in Bitcoin one day could be a lot more (or a lot less) the next.
In November 2017, a luxury home in Queensland was listed for 500 Bitcoins (approximately AU$5.15 million at the time). Due to a soaring increase in the value of Bitcoin in late 2017, however, the sellers were forced to halve the number of Bitcoins that they were asking for.
The volatility of Bitcoin also complicates the settlement process. The time period between the date that the seller and the buyer sign a contract for sale and when settlement takes place can be weeks if not months. If the sale price in the contract is expressed in Bitcoin, there could be significant difference between the value of the Bitcoin at the contract date and at settlement. To get around this, the sale price for an Australian property could be be expressed in Australian dollars (which is far more stable than Bitcoin) with the amount of Bitcoin payable to be calculated at settlement.
As part of the settlement process, the purchaser usually transfers funds into his settlement agent’s trust account. The funds are held on trust for the vendor and are released when the transfer of land or title has been registered. It is also unlikely that conveyancers and settlement agents have the capacity to hold Bitcoins in trust.
Transactions involving Bitcoin would also complicate the payment of stamp duty on property transactions in Australia – stamp duty is calculated on the sale price of the property and is payable only in Australian dollars.
Property sellers paid in Bitcoin may also be liable to pay capital gains tax on any capital gains in the Bitcoin after settlement (i.e. where the Bitcoin increases in value following settlement and is subsequently spent or converted to Australian dollars)
Currently in Australia the settlement process and calculation and payment of associated fees and charges is based on the Australian dollar. With the volatility of Bitcoin and the general reluctance of Australian government agencies to accept Bitcoin payments in relation to property transactions, it is unlikely that property transactions will be paid for entirely in Bitcoin anytime soon.