Posted on Tuesday February 12, 2019
Can it be done? Yes, and we have the specialist knowledge to show you how.
Since 2017, many individuals have accumulated a vast amount of cryptoassets, which have values of many thousands and hundreds of thousands of pounds; so valuable that you may consider exchanging these cryptoassets for a residential or commercial property.
When considering a transaction like this, there are multiple legal factors that need to be considered by both a buyer and seller.
Firstly, the property price will likely be priced in Great British Pounds (GBP), therefore the buyer and seller will have to agree a price of the cryptoasset that is going to be used in exchange of the property.
So, let us show you how….
A Seller has a property with an estimated value of £1,000,000.
A Buyer has 800 bitcoins (BTC).
The Seller will firstly need to agree to accept BTC instead of GBP. Then the parties will have to agree a price of the BTC.
As of 31 January 2019, the value of 1 BTC is £2,593.62, as an average price on exchanges. However, the parties can agree a price between them.
In this example, the Seller might only accept BTC for the property if the BTCs are valued at, say, £2,000 per 1 BTC. The Buyer will therefore have to pay the seller 500 BTC for the property.
This may be agreed in a separately worded crypto agreement or within the conveyancing contract; this needs specialist lawyers.
Of course, if the price of 1 BTC falls to £1,500 or rises to £2,500, the parties will have to take that risk, unless they agree otherwise which can in itself be documented.
Once a price is agreed, the conveyance will act much like any normal conveyance; however, there are a few specialist terms and clauses, and proprietary mechanics to make this transaction work which need to be considered. We have drafted real life examples of these clauses.
Due Diligence on the cryptoasset
Whether buying a property with cryptoassets or selling a house in exchange for cryptoassets, either party must carry out proper due diligence on the cryptoasset.
The Financial Conduct Authority (FCA) have released guidance on the regulation of cryptoassets, so it is important that you know what type of cryptoasset you possess and intend to use in the purchase of the property, and that use lawyers experienced in the use of these assets.
For example: –
- Exchange tokens
An exchange token is not issued or backed by a central authority and its intended use is that of a medium of exchange. An example of this is BTC; these are not regulated by the FCA.
- Security tokens
These tokens grant the holder financial rights, like a share or bond. An example of a Security token is one that is purchased for £10, which pays 10p to the bearer, a year. These cryptoassets will fall within section 19 of the Financial Service and Markets Act 2000 (FSMA) and are therefore regulated by the FCA.
- Utility tokens
These tokens grant the holder access to a current or prospective product or service; they are not regulated. However, some of these tokens will constitute “e-money” which falls within the scope of the FCA.
Why is this important?
It is important that the type of cryptoasset is properly defined before any agreement is entered into. Purchasing a property with certain types of cryptoassets may constitute Dealing with a Specified Investment, which would result in a breach of FSMA.
And what if you are the seller?
From the view of a seller, if you are receiving a cryptoasset in exchange for real property, you need to ensure that the cryptoasset you are receiving can be liquidated.
It may be that the cryptoasset that is being proposed to purchase the property can be found on several cryptoasset exchanges.
However, simply because the cryptoasset is listed on exchanges at a certain price, does not automatically mean that the receiver of the cryptoasset will be able to liquidate their entire holdings.
It may be that, for example, only ten percent of the received cryptoassets can be liquidated and then the seller would be stuck with cryptoassets they cannot sell.
It is important that proper due diligence is carried out on the proposed cryptoasset.
Any seller of a property looking to receive cryptoassets in exchange for the property should ensure that proper due diligence is carried out on the cryptoasset. This must involve solicitors with specialist knowledge.
Source of funds and banking
It is the role of a solicitor to ascertain where the funding of the cryptoassets come from, for the purpose of Money Laundering Regulation. This is not something that many solicitors are able to do, and it often will require specialist knowledge to carry out proper research, in conjunction with normal solicitors’ checks.
Completing the purchase
In a normal “money” transaction, the buyer will send their solicitors the purchase price of the property to hold. On completion, the buyer’s solicitor will undertake to send the seller’s solicitor the purchase price and the seller’s solicitor will undertake to transfer the title of the property, to the buyer.
However, solicitors will generally not agree take possession of the buyer’s cryptoasset and similarly the seller’s solicitor will refuse to agree to accept the cryptoasset on completion.
In these circumstances, a proprietary mechanism will be used to complete this undertaking; that takes specialist drafting of the documents by experienced cryptoasset lawyers.
And when the purchase is complete………
Once the completion of the transaction has occurred, the seller has received the cryptoassets and they have been liquidated the next step will be for the funds to be accepted by the bank.
Many banks will not agree to receive deposits of funds that come from dealing with cryptoassets.
Many banks do not have specialist accounts in place to receive such deposits. However, some banks will allow for this; it is a question of expert legal knowledge of the sector.
Stamp Duty Land Tax is a tax payable on the purchase of a property. The SDLT liability is easily calculated in a typical “money” purchase; it is a percentage of the purchase price.
In respect to the purchase of a property with cryptoassets, the SDLT will be calculated in relation to the value of the cryptoasset on the day of completion, as evidenced by reputable exchanges. However, if a lower price for the cryptoasset is agreed, as in the example above, specialist legal knowledge is required.
When the title of a property is transferred from one party to another, a form will be drafted with the details of the property transaction. This form will subsequently be sent to the Land Registry for them to populate the register with details of the transaction and ownership (amongst other things). If a property is purchased with cryptoassets, it is possible to record the purchase price, in BTC, rather than in GBP.
A case in 2017 saw property developers, Go Homes, sell two luxury homes in the UK for BTC. In this circumstance, the Land Registry agreed for the first time to record the sale price in cryptoassets.
HMRC have recently released a policy paper on “Cryptoassets for individuals”.
The policy paper has stated that when using a cryptoasset to pay for goods or services, it constitutes a disposal and the profits made are subject to Capital Gains Tax (CGT). Therefore, when purchasing a property for cryptoassets, the buyer should seek specialist tax advice.
As a Seller, if you decide to liquidate and sell the cryptoassets you have received, any profits made will be subject to CGT.
Why Mackrell Turner Garrett
At Mackrell Turner Garrett, we have a specialist cryptoasset team with real-time experience of what is required to purchase a property with crypto.
Our involvement in advising on cryptoassets since 2017 has enabled us to build a wealth of knowledge that help our clients with their cryptoasset dealings, even if it has never been done before.