The future is now? South Carolina becomes blockchain testing ground with house bought as an NFT

COLUMBIA: History is purportedly being made in Columbia.

Last month, a handful of entrepreneurs announced they had created a process to allow a person to buy a home completely online and in a matter of minutes. A real estate investor, Adam Slipakoff, says he bought a US$175,000 (RM830,987) house in southeastern Columbia near Garners Ferry Road with the click of a button.

“I never imagined I could buy and finance a house with a simple click, rather than going through the time-consuming and cumbersome traditional settlement and mortgage process,” which can sometimes take months, Slipakoff said in a widely-circulated statement.

After the sale was announced, national news outlets including Newsweek and Forbes jumped on the story, seeming to confirm that something interesting did indeed happen here.

During the home’s closing event last month, Columbia Mayor Daniel Rickenmann even made an appearance, after being invited by the entrepreneurs.

“We’re open to new ideas and business here in Columbia, so we are obviously excited to welcome these new homeowners to our community,” Rickenmann told The State. “Innovation in our city that attracts new residents will only help to expand Columbia’s appeal abroad.”

It’s one of the first sales of its kind and represents a claim being staked by Internet startups that say this is the beginning of a whole new way of buying and selling almost everything. At the same time, industry experts have questions about how secure these sales will be and whether they can ensure consumer protections.

The sale leveraged some relatively new Internet technologies — cryptocurrency, the blockchain and non-fungible tokens. Even the home’s mortgage was conveyed in cryptocurrency. The use of those technologies is what has ultimately excited some and created scepticism in others.

Experts say while this may be an exciting test case, the technology is a long way from being able to help the average home buyer.

Why does this matter and what does it even mean?

The reason this home sale drew so much attention is that the home was purchased as a non-fungible token, or an NFT.

Yes, NFTs, those things that have largely been associated with ludicrously expensive digital pictures of smoking monkeys.

An NFT is basically a digital receipt, or a “one-of-a-kind trading card.” They’ve gradually been making their way into the mainstream. Corporations such as Nike and Coca-Cola are attempting to find more money-making ways to use them, while engineers and Internet startups across the US are looking for ways to expand their footprint.

In the case of home-buying, advocates say the technology cuts out middlemen and streamlines the process, saving a buyer or seller money on broker fees and other expenses.

“The idea is can you lower the number of steps or the number of transaction fees that are charged along the way,” said Matthew Liu, a founder of Origin Protocol, one of the companies involved in the Columbia house sale. “Can you allow people from different parts of the world to interact with one another, send money to each other, transact for goods, without having to have the confines of the traditional world?”

This is one of the major promises of the blockchain and cryptocurrency, that it’s decentralized and unbound by real-world red tape. That’s also one of the major red flags for experts who say the red tape is important for protecting consumers.

“On paper, this is all going to work at some point,” said David Ostrowski, a Northwestern University faculty member and PhD in computer science. “Do you want to be an early adopter? Personally, I wouldn’t.”

For the last two years, Ostrowski has researched uses for the blockchain in new areas.

He said the use in real estate could be transformative, but it probably isn’t ready yet. The blockchain and NFTs allow for a lot of automation. Theoretically, the technology could automate traditional home-buying steps, cutting out the need for a broker, for example.

Suddenly, home buyers are saving money on that broker’s fee. But it’s unlikely the business model has been fleshed out enough for the average buyer to be able to safely use the same process Slipakoff went through, Ostrowski said.

In the case of the home in Columbia, an LLC was created to own the property — which is not uncommon in real estate. Then, an NFT was created to represent ownership of the LLC. The LLC agreement notes that the owner of the NFT owns the property.

The arrangement has created a lot of uncertainty. Questions circulated on social media asking whether someone could steal the NFT in a hack, thereby taking ownership of the home, or whether this sale is protected by federal law the way traditional home sales are.

Liu said there’s a misconception that the entire thing happens online and out of bounds of the real world. He also stressed that all state and federal laws around real estate sales have been followed.

The company Roofstock, which has been active in real estate for years, including in Columbia, facilitated the sale. The buyer did have to go through an extensive real-world verification process before he was allowed to buy the property.

“It’s not this totally cowboy thing,” Liu said.

Still, it’s unclear whether a home buyer would have any legal protections if a sale like this went awry.

Because cryptocurrencies are relatively new, and because this is a new use case for the technology, there isn’t much legal precedent to establish how courts should respond if someone gets ripped off, Ostrowski said.

“I draw the analogy between this and, let’s say, autonomous cars. They represent a huge opportunity. …But you know, do we trust autonomous? Could you trust sitting in a car at highway speeds without a steering wheel? I don’t, and I’m a software guy,” he said.

Liu also acknowledges that the technology isn’t ready for the masses yet. The home was purchased as a rental property by an established real estate investor who was already engaged with cryptocurrency, so it’s not as if the buyer is purchasing a home for himself.

But the Columbia purchase was in part meant to showcase the technology’s potential use for the average buyer, Liu added.

“It’s like this local story,” he said. “It’s not this future thing that only exists in television. This is happening in the US on a local level, and it’s happening today.”

So, is the future now?

Despite the sceptical reaction of many online, the NFT home sale isn’t actually that far off from what the real estate industry is actively talking about.

The National Association of Realtors this month will meet for an annual conference. One of their featured speakers will lead a talk called “Cryptocurrency, blockchain and NFTs.”

“That’s been the theme over the past year,” said Nick Kremydas, CEO of the South Carolina Association of Realtors. “The industry is definitely talking more about these technologies and their impact on the business.”

It’s still a far-off possibility. The requirements when buying a house are difficult to automate, Kremydas said. Things like home inspections, title work, a closing attorney to process the deed. It’s also unclear if a mortgage conveyed in cryptocurrency has any federal protections.

Kremydas tries to stay engaged with the possibilities. Maybe blockchain can make the process of buying a house safer, maybe it can make things cheaper eventually. Wire fraud is not uncommon in traditional home sales, he said.

“If we’ve got these traditional tools that we feel for the most part are very safe, very secure, but fraud does happens, there’s a lot of room for more confidence to be created around these new technologies,” he said.

But until those potential tools can guarantee safety for customers, he encourages buyers to follow the existing channels to make sure they don’t get robbed, or at least to ensure they have some protections if something does go wrong.

Liu said its up to those building the technology to make sure those safe guards exist. It’s not ready yet, but he thinks it will be in the next five years.

The goal isn’t necessarily to create an entirely online home-buying experience. Rather, he said the hope is that the average person won’t even need to understand the blockchain or NFTs in order to benefit from their uses.

”At some point if we’re successful, the blockchain technology will be hidden and people will just be like, oh cool. This is just like a cheaper, faster, more convenient way to buy a house,” Liu said. – The State/Tribune News Service

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