Traditional businesses are partnering with blockchain intelligence firms to facilitate house purchases for a new generation of young crypto entrepreneurs.
In December 2017 two properties were purchased in the UK with Bitcoin. The purchases sparked excitement that Bitcoin-backed property transactions would become commonplace, reflecting the high expectation placed on the cryptocurrency. Alas, this was no lasting trend. Weeks later, the market collapsed and valuations remained depressed for two long years.
Arguably, the sector in 2017 was not ready for the complexities of property purchases. Immediate concerns focused on how to appropriately assess the sources of crypto funds to address financial crime risks. Regulations were far from prepared, let alone settled. But perhaps more important was the lack of specialist crypto services to facilitate house purchases in the first place.
Fast forward three and a half years and things are changing. In partnership with UK law firm Kingsley Napley, Alaco Analytics has just assisted on its twentieth crypto-backed home purchase in the UK this year. The frequency with which these purchases are now being made suggests a trend which is set to last.
It is too early to tell how large the market might be for such purchases, but there are two undeniable and connected factors. First is the emergence of a services ecosystem – from blockchain analytics companies to law firms and accountancies – willing and able to handle transactions using crypto proceeds. Second is the breadth and depth with which cryptocurrencies have penetrated the UK. This is most apparent among younger age groups, whose involvement in cryptocurrency is generating a new, wealthy demographic.
According to a survey conducted by Finder in February 2021, a fifth of UK citizens own or have owned cryptocurrency. Finder also found that 40% of those aged 18-34 have bought at least one type of cryptocurrency, and that crypto ownership among this age group is set to increase to 60% in the coming years.
This is a fact we see reflected in our work: crypto-backed property buyers are overwhelmingly in their 20s and 30s. Students, teachers, young professionals – many of them first-time home owners who would otherwise struggle to get on to the competitive UK property ladder.
The manner in which these investors have made their money echoes the pace at which the crypto sector evolves. Proceeds are rarely just the result of Bitcoin trading. While Bitcoin often serves as the starting point, many have made significant returns investing in Ethereum, ERC-20 tokens, and more recently in DeFi and NFTs.
Common to almost all of these successes is the relatively small initial investments and often staggeringly high returns, some exceeding 1,000%. Timing plays a factor, but so does curiosity and risk. Those who took an early chance on SushiSwap or ChainLink, for example, did so at considerable financial risk, but generated substantial returns. Such decisions require a fair amount of technical knowledge to get there, let alone successfully navigating the stakers, liquidity pools, yield farmers, and everything else in between.
The sticking point for these entrepreneurs has been transitioning those proceeds into brick and mortar. AML procedures, proof-of-funds requirements, nascent regulatory regimes, and a general hesitancy towards cryptocurrency in the financial sector has made that transition difficult. In turn, this has caused enormous anxiety among prospective buyers with crypto proceeds.
The complexity of new assets like DeFi has added to the challenge. Try explaining to a bank that your money comes from a token called AquaGoat that you bought on PancakeSwap. Or to a mortgage broker that you’ve been yield farming Compound on something called Uniswap and you’d like to buy a house, please. The conversation might be short.
Increasingly, however, the gap is being bridged through partnerships between traditional property-focused companies and crypto services firms. Such alignments have been crucial in unlocking the value of crypto assets for a wide range of investments. Traditional providers are able leverage their credibility with regulators and experience of managing compliance risks while crypto services providers bring with them a fluent ability to navigate the digital realm. This allows informed decisions to be made regarding the legitimate origins of crypto asset portfolios.
Indeed, in many ways, source of funds analysis is far more comprehensive in the crypto world than for its fiat cousin. Every transaction and address – privacy tokens aside – is publicly available. Crypto specialist firms now offer solutions which allow fund movements to be pinpointed across exchanges, payment services, mixing services and dark web marketplaces – showing where customer funds have been, how they entered and exited the ecosystem, and where the risks lie. Even if the customer has an incomplete transaction history, it is possible to fill the gaps.
And for all the concern around financial crime and money laundering in the cryptocurrency sector, relatively few, if any, prospective buyers generate wealth via illicit means.
So whilst those two Bitcoin property purchases in 2017 appear anomalous, they helped set an important precedent. Crypto-backed property purchases were possible. And from this has come a wave of house purchases among young, first-time buyers that is set to get bigger as the market matures.
Henry Burrows is the CEO of Alaco Analytics, a provider of due diligence and blockchain intelligence for the digital asset space.