Jack Dorsey, co-founder of Twitter and CEO of Square, made headlines in March 2021 when he sold his first tweet as a non-fungible token (NFT) for over $2.9 million, which he converted to Bitcoin and donated to a charity assisting Africa’s pandemic response. The digital currency market is raising many questions, including how will NFTs and cryptocurrency impact Arizona real estate market?
For the uninitiated, an NFT is a digital asset that can be bought and sold like a physical asset. People are now buying NFTs for digital artwork, music, videos and items to use in digital spaces known as the metaverse. The record of the sale is stored in a decentralized digital ledger called a blockchain that proves ownership, akin to having the title for a car.
To create a smart contract, which NFTs transactions are based on, a buyer and seller agree to terms that are written into code and housed on the blockchain. The terms of the contract are self-enforcing without the need for a third-party facilitator.
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Think of these smart contracts as vending machines. When the right input is applied — putting in a few dollars and pressing a button for a particular drink — there’s a guaranteed outcome without the need for a cashier to scan the item and process the payment.
Over the last year, NFTs have reached mainstream consciousness. Celebrities such as Mark Cuban, Steph Curry and Jimmy Fallon have purchased NFTs from the popular collection known as the Bored Ape Yacht Club. 2021 saw $17,694,851,721 in the volume of dollars traded compared to 2020’s $82,429,916 — an increase of 21,350%, according to NonFungible’s 2021 market report.
With so much attention and money flowing to NFTs, what effect could this novel technology have on one of Arizona’s hottest markets?
Real estate, digital currency
In early Feb. 2022, Florida homeowner Leslie Alessandra auctioned off her five-bedroom, three-and-a-half-bath house in the first NFT real estate sale in the U.S. The winning bid was for 210 Ether — the second largest cryptocurrency by market capitalization behind Bitcoin — valued at $654,309.60.
Rather than the typical process of buying and selling a house, the first step involved Alessandra transferring the ownership of her home to a limited liability company (LLC) — the home being its only asset. The winning bidder then received an NFT recording their ownership of the LLC to the blockchain, and Allesandra collected 210 Ether in her digital wallet.
Propy, the blockchain startup that helped facilitate the auction, says on its website that it believes “in a world where real estate transactions are ‘self-driving’” utilizing smart contracts. In particular, Propy wants to help brokers, agents and title companies speed up closing and transform it into a paperless, remote process.
But is this just a gimmick, or is this truly the future of real estate deals? Josh Peters, owner of Stately Living and co-founder of RETSY, believes there is a practical use case for this technology.
“It’s a more efficient transaction because you don’t need all of the paperwork,” he says. “It’s also a platform and technology that people — especially younger individuals — are more comfortable with. Using the blockchain is more secure too. There’s so many holes and opportunities for theft and fraud that could occur in the current process.”
In a forward thinking move, the Arizona Legislature passed House Bill 2417 in 2017, allowing the use of smart contracts in commerce and recognizing signatures and records secured using blockchain technology as valid electronic signatures — meaning NFT real estate sales could be coming to the Grand Canyon State soon.
Industry in flux
As with any innovation, NFT real estate technology has the potential to shake up the status quo. More people are already using iBuyers for home purchases and sales, which effectively circumvents the need for a realtor — and their commission.
“It absolutely will reshape real estate as we know it,” Peters notes. “We’re seeing major corporations that have shifted the fundamentals behind how real estate is transacted. Now, more than ever, realtors need to understand that disruption may occur. Smarter realtors are adding more value to the equation in representation whether they’re becoming experts in a particular zip code or a specific type of real estate.”
Even though leveraging blockchain technology to simplify the homebuying process sounds attractive, there is a critical issue that may hamper adoption — the volatility of cryptocurrencies. Take the sale of Alessandra’s house for example. The 210 Ether she received in February was worth $654,309.60. At the time of writing, that same 210 Ether is worth $560,324.10, constituting a 14.4% decrease in value. This could limit the feasibility of cryptocurrency home sales to auctions with a minimum price and limited time span, as was the case with Alessandra’s house.
Moreover, the feasibility of these transactions could change as they attract more attention from the government. “Legislation and government regulatory bodies are always behind emerging technologies,” Peters says. “We’ll see more government attempts to regulate and tax so they can grow their slice of the pie.”
Indeed, the federal government has been keeping an eye on the nascent sector. On March 9, 2022, President Joe Biden signed an executive order to study cryptocurrencies and blockchain technology, even calling for the exploration of a U.S. Central Bank Digital Currency, a digital form of the dollar.
According to a fact sheet released by the White House on the matter, “The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system and the climate. And, it must play a leading role in international engagement and global governance of digital assets consistent with democratic values and U.S. global competitiveness.”
As businesses and all levels of government see the value of this technology, Peters believes that more high-dollar transactions will be done with cryptocurrency.
“We’ve got 60 million Baby Boomers right now that worked their absolute tails off. These people didn’t really grow up with a lot of technology, so they’re probably the least inclined to be strong in the tech world. But there’s going to be a massive wealth transfer over the next 10 years as they unfortunately pass,” Peters concludes. “That wealth will go to the 90 million millennials who grew up with technology and are extremely comfortable with it. Ultimately, I think crypto and NFTs are going to be used a lot more in the future because of that.”