Take the Money and Run (from Bitcoin)?

“Imagine there’s no countries”

– Imagine, John Lennon

In May 2017, 300,000 computers worldwide were infected with “Wanna Cry” ransomware, whose creators demanded $300 worth of bitcoin to unlock the computers of unsuspecting users or risk permanent damage. The virus was so serious that it temporarily knocked out the computer network of Britain’s National Health Service among other damage to airlines, utilities and other mission critical enterprises. All told, the hackers hauled in $143,000 worth of bitcoin and, as of this writing, still haven’t been caught.

Luckily for these evildoers, they were paid in bitcoin, making these transactions untraceable. And the value of their initial $143,000 haul has exploded to nearly $1.2 million today, as the price of bitcoin has increased from $1,400 to $11,500 per unit since May 2017. Supervillains may be evil, but no one ever said they didn’t know how to make money. That’s why people become supervillains!

I believe that bitcoin has the power to change the world for the better, but only if it is tightly regulated. Cryptocurrencies and the “blockchain” technology behind them allow for the anonymous transfer of value without the need for government backing. The “full faith and credit” that backs all other world currencies is eliminated by the “crowd” determining value for the currency and the users accepting that value by exchanging the cryptocurrency for something else of value. Nevertheless, bitcoin still has a long way to go before it eliminates the need for trusted intermediaries like companies and governments.

Manipulation of a country’s currency is one of the primary means of political strength, both within and between countries. Inside a country, revolutions typically don’t just start with consensus around a certain ideology; they typically are a reaction to hyperinflation or some other economic calamity often caused by a fat thumb on the money printing press by the dictator du jour. The way to a man’s heart may be through his stomach, but the way to his head is through his wallet.

This scenario is playing out right now in Venezuela, where hyperinflation is putting the country on the verge of civil war. More ominously, hyperinflation in Germany in the 1920s was a significant reason behind the rise of the Nazi party. In short, cryptocurrencies have the potential to stabilize the economies of countries with volatile monetary value by taking the power to manipulate the currency out of the hands of the central government.

Perhaps more importantly, cryptocurrencies have the power to eliminate a country’s intentional devaluation of its currency to make its exports more competitive on the world market in what is known in economic circles as “beggar thy neighbor”. It is the same basic principle behind the euro, which prevents European member nations from currency competition. In short, the euro was designed for a lot of purposes, but one of its primary ones was to prevent economic war between European member nations.

The problem with this sunny cryptocurrency scenario is that self-determination by nations is kind of important. It’s why China has banned bitcoin and I expect more governments will follow suit. To paraphrase Mel Brooks, “It’s good to be the king.” And the king follows the golden rule: “He who has the gold makes the rules”.

What are the implications of cryptocurrency on commercial real estate? I am increasingly asked, “Should we take bitcoin instead of cash” for the proceeds of a transaction? The short answer is that you can accept anything of value and cash isn’t always king, particularly in the publicly traded entity context where share-for-share or shares-for-asset transactions are common. The entire principal behind the 1031x is that you are trading asset A for asset B in a theoretically cashless transaction. To push this a bit further, you can trade your asset for anything of value from gold bars (an Auric Goldfinger favorite) to a big box of puppies if you want. Who doesn’t like puppies!

The practical problem of trading for bitcoin today is its extreme volatility. The value of the U.S. dollar and other currencies moves, but in extremely small percentages daily (a 1% move in the Chinese yuan would make headlines in the Financial Times). While there are some new strategies to “hedge” some of the movement in cryptocurrencies, if you are still inclined to accept bitcoin for your property despite its volatility, don’t lock in value on the signing of the contract. If you “lock in” the exchange on the signing of the contract without putting in a band to change the formula at closing or a serious hedging strategy, all I can say is you shouldn’t be in real estate, you should be in Vegas. The better answer is to do the deal in cash, buy bitcoin with the proceeds and then take it all to Vegas (and please invite me to do a speech while you’re there so I can, um, compliment you on how smart you are).

Given its potential power for good, shouldn’t we just give bitcoin free reign to grow like we have largely done with the big tech firms? Uh, no. First, most world governments will push back hard against bitcoin (and some outright ban it) because it threatens their sovereign power.  Second, while bitcoin didn’t invent modern supervillains (Ian Fleming did), it weaponized them through anonymity. International money laundering laws exist for a reason and no currency of exchange can be excused. Third, given its anonymity, cryptocurrency is a tool for tax evasion. You can point to a lot of problems with emerging world economies, but tax evasion is at the top of the list.

The size of the “shadow economy”—the portion of the economy that goes unreported (i.e., untaxed) by federal governments—is staggering. According to several estimates, the size of the U.S. shadow economy is about 9% of the overall economy. By contrast, Greece and Venezuela are at more than 30% (and if you’re trying to guess the winner of this race, Georgia—the country, not the state—is at more than 65%). Through anonymity, cryptocurrencies don’t create the motivation to evade taxes (that was there since the beginning of time), it enables it.

If everyone paid their taxes, not only would people have more respect for the rule of law, but central governments could govern and help their countries grow. Some countries have recognized this problem, and kudos to Prime Minister Modi in India (with a 24% shadow economy), who in 2016 required that all cash be deposited in banks or risk being voided. This led to bank deposits totaling US$236 billion; new notes were printed and centralized electronic (i.e., traceable and taxable) transactions are now up by more than 20%.

I’m all for cryptocurrencies, but they need to be leashed. They can be a power for tremendous good, but their power to corrupt must be put in check.

 

By Spencer Levy, Americas Head of @CBREResearch | Senior Economic Advisor