Just a few days ago, a project called CryptoHomes.io was launched in Malta. It is the first serious attempt to establish a full-service real estate brokerage platform using bitcoin and other cryptocurrencies in the emerging “Blockchain Island” and beyond.
Malta is experiencing a booming real estate sector with skyrocketing prices and an ever-growing demand for both commercial and residential properties. The continued growth of the gambling industry and the emergence of many fintech and blockchain oriented businesses, combined with the attractiveness of a small Mediterranean island rich in cultural heritage, makes it likely that this trend will continue.
While the purchase of real estate with bitcoin might appear like any other crypto transaction, the real estate business entails a few a particular issues and regulations that must be taken into consideration.
The legal framework of any such transaction will be determined by the laws of the land where the property is located and where the transaction takes place. Additionally, tax and regulatory issues might arise in other jurisdictions where (parts of) the transaction is handled. While to some extent the parties might be able to agree on a choice of law, individuals engaging in such a private transaction will still be subject to all applicable legislation and should carefully check all legal and tax aspects of the deal.
Regarding the transfer of bitcoin, the European Court of Justice has already ruled back in 2015 that the services of a bitcoin exchange in exchanging bitcoin for traditional fiat currency are exempt from Value Added Tax (VAT) on the basis of the “currency” exemption (Skatteverket v David Hedqvist Case C-264/14). This judgment was helpful in providing the first guidance regarding the tax treatment of bitcoin payments.
Recently, Malta has gained worldwide attention by passing the first comprehensive legislation covering the field of blockchain technology and cryptocurrencies. None of the three acts and subsidiary regulations enacted so far directly concern property transactions, however, some of the regulations do provide the framework and legal certainty for service providers which are a necessary part of any such transaction. To name just one example, the Virtual Financial Assets Act provides for the future regulation of Nominee and Custodian services. Legal certainty on the establishment of custodian and escrow account services will also be a very useful development in the future.
In areas where the new acts and guidelines do not provide detailed regulation, it is important to keep in mind that existing legislation will remain in force and is fully applicable even when new means of payment are concerned. In particular, full compliance with anti-money laundering regulation is of crucial importance. Since the enactment of the 4th European AML Directive into Maltese law, any services regarding real estate transactions are considered a relevant activity under this regulation and strict conditions apply.
The fact that authorities perceive a heightened risk of money laundering in any cryptocurrency transactions calls for particular scrutiny and careful checking of identities and the source of funds. Another challenge the Maltese property market presents is the specific restrictions on the purchase of properties by foreigners and compounding that is the lack of a well-structured land registry.
Both these issues can be tackled, but in the crypto space, where high volatility and speed are ever present, proper contract provisions and carefully drafted procedures are essential. Despite these concerns, the emerging blockchain eco-system in Malta provides the perfect testing ground for crypto-based real estate transactions. The business-friendly approach of the government should help to overcome existing uncertainties and administrative hurdles. Once enacted, the new laws and guidelines will further facilitate such transactions and provide additional legal certainty.
For the time being, existing laws do provide a sufficient framework. When it comes to contractual relationships, escrow and payment procedures, and the speed of transactions, the creation of proper guidelines will require a highly skilled team combining knowledge and expertise from the real estate sector, regulatory affairs, and financial services.
Turning cryptocurrency into a solid real estate investment is a reality that I believe is here to stay. Therefore, the legal community will need to be pro-active in creating procedures for this new form of property investment in order to make sure that the market develops on sound foundations.
The author of this article, Jan Henrik Stockhausen, is the Co-Founder of CryptoHomes.io and a partner at Kessler Stockhausen Consulting. This article is not intended and should not be understood as legal advice. Anyone engaging in property transactions in Malta should do so only based on proper professional advice.