Cryptocurrency as Funds in Escrow Transactions?

An escrow officer's main duty in any transaction, be it a real estate sale, liquor license transfer, or hard money loan, is to act as a neutral third party between the buyer and seller (or lender and borrower). The escrow officer holds funds in a trust account and only disburses those funds once both parties have fulfilled all of their obligations in the transaction. Sometimes those obligations entail performing repairs or professional inspections, and sometimes it's just a short period (often 30 or 60 days) in which the escrow officer can get all of the necessities taken care of (Grant Deed, Change of Title, insurance, property liens, etc). Throughout this process, the escrow agent has a fiduciary duty to safeguard the funds in the trust account until such time as they can be disbursed.

Because an escrow officer almost always has to hold onto funds for some amount of time (even in all-cash offers), the funds need to be in the form of a currency that will retain its value. Until recently, that was simple. In the United States, the value of the dollar fluctuates very slightly each year with respect to the currency of other nations, but will generally be worth approximately the same amount from one day to the next. An issue may arise if the buyer wants to pay with funds that are not American currency, or even any type of national currency. In some cases, buyers want to make a purchase using Bitcoin.

Bitcoin is a well-known type of blockchain-based cryptocurrency. A blockchain is a decentralized record of all transactions happening within an online peer-to-peer network. The benefit of such an innovation is to allow users to confirm the transfer of funds without the need for a third-party like a bank to wire the funds. Cryptocurrency is the "currency" that is being transferred through the online blockchain. In a general sense, cryptocurrency is a chunk of data that can be easily transferred between users. While cryptocurrency is a convenient way to transfer funds, there are several downsides. First, cryptocurrency has no intrinsic value. One Bitcoin is only worth as much as someone is willing to pay you for it. There is no guaranteed trade-in value for paper currency or other commodities such as gold or diamonds. Second, cryptocurrency has no physical form. There are no bills or coins -- nothing except a block of data that says how much currency a user owns.

Unlike the U.S. dollar, cryptocurrency doesn't have a stable value. There are owners of Bitcoin who put in thousands of dollars just to lose it all in days, and there are users who saw their Bitcoin investment increase a thousand-fold over the course of a year. There's no way of predicting if the value of a cryptocurrency will go up or down, as the value is determined by how much people want it. It is a currency that exists in the minds of its users. If all buyers are willing to pay $10,000 for one Bitcoin, then that's the value of the Bitcoin. If all buyers are only willing to pay $100 per Bitcoin, then that's its value. Such an unstable currency is unusable by an escrow officer because there's no guarantee that the seller will receive the amount of real money (U.S. dollars) that they had assumed based on the price of the cryptocurrency at the time when the purchase agreement was signed. During the 30 or 60 day escrow, while the currency is sitting in a trust account, it could just as easily go up in value as it could go down. That kind of volatility is bad for business, so even if a buyer can find a seller willing to accept the cryptocurrency, Escrow companies cannot accept this as currency as Bitcoin does not qualify as verified “good funds”.

Finally, there's the major issue that blockchain is decentralized, which means it doesn't have any official (governmental or otherwise) institutions backing up the currency. The decentralization is a good aspect to many users since it makes the transfer of funds relatively inexpensive, fast, and painless. However, decentralization also means that if your blockchain account gets hacked and you lose your cryptocurrency, you're on your own. With centralized systems (such as banks or credit cards), if you are the victim of cybercrime, your funds will generally still be safe, and the financial institution will take the burden of dealing with law enforcement in tracking down the criminal and getting the money back. With blockchain, there's nothing proving that a piece of cryptocurrency belongs to you. It's just a chunk of online data associated with an online account that someone else might gain access to. This is why the inherent instability of cryptocurrency in its current form is not an acceptable means of funding an escrow transaction. Perhaps in time, and with more regulation and security this could be the way of the future, though for now, escrow companies do not accept Bitcoin in lieu of U.S. currency.

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