Propy is a Silicon Valley property technology startup that is revolutionizing real estate transactions with blockchain technology and NFTs. The firm’s Founder and CEO, Natalia Karayaneva was frustrated with how time-consuming and often fraudulent real estate transactions were. She founded Propy in 2015 to automate the real estate transaction process “by introducing the technology to allow entirely online and self-driving real estate transactions on smart contracts.” The innovative technology automates the entire closing process online by deploying smart contracts on the blockchain, which “helps brokers, agents, and title companies migrate to a paperless remote closing.”
Blockchain-powered real estate transactions have many advantages over the traditional transaction process, including higher profits for brokerages, less fraud, and a faster, easier, and more secure transaction for everyone involved in the process. Propy has completed more than 1,000 real estate transfers with over $1 billion worth of transactions through its platform. The startup is backed by some of the most established tech investors in Silicon Valley, including billionaire VC investor Tim Draper and TechCrunch founder Michael Arrington. Propy’s success so far has only generated further investor and public interest in the company. The prop-tech startup made history twice as the first platform to transfer real estate through the blockchain in 2017 and an NFT in 2021. Even with all the success that Propy has seen in the past few years, the future of blockchain and NFT transactions is uncertain. Propy’s NFT transfers face various legal issues. Further, government regulations on cryptocurrencies and NFTs are increasingly being scrutinized worldwide.
The blockchain is a digital ledger for cryptocurrency transactions such as Bitcoin or Ether. Recording information on the blockchain “makes it difficult or impossible to change, hack, or cheat the system,” which is a huge advantage for the real estate industry as it relies heavily on paper deeds and titles. An NFT is a unit of data that is stored on a blockchain, which certifies a digital asset to be unique. They can be in the form of photos, videos, audio, or other types of digital files. Anybody with access to the internet can access a copy of the original file online; however, an NFT stored on the blockchain “provides the owner with a proof of ownership that is separate from copyright.”
NFTs are emerging as a viral and disruptive player in the finance and art worlds, quickly becoming an asset class worth over $250 million with sales exceeding $2 billion in the first quarter of 2021. NFTs continue to see significant growth in popularity on both online forums and established auction houses like Christie’s and Sotheby’s. “What Bitcoin has done to banking, NFTs are doing to the world of art and collectible objects” perfectly summarizes how these alternative assets have disrupted the traditional banking and art worlds.
Propy took note of the vast potential that blockchain and NFTs have for disruption and
leveraged that technology for the real estate industry. In 2017, Propy’s platform conducted the first real estate transaction ever sold and transferred on the blockchain. Michael Arrington, founder of TechCrunch and Arrington XRP Capital, bought a brand new 506 square foot studio apartment in Kiev, Ukraine through Propy’s platform. The transaction took place entirely via smart contract on the Ethereum blockchain with cryptocurrency as payment and was the first property in the world to be sold and transferred on the blockchain.
Arrington remotely paid $60,000 for the apartment using a cryptocurrency called Ether and “Pro” tokens, a new digital currency issued by Propy, for the registry fee. The title change was recorded on paper and registered on the Ethereum blockchain on a cyber-ledger. Alex Voloshyn, Propy’s Chief Technology Officer, highlighted that what made the deal groundbreaking was the fact that the “online and offline title recording processes were integrated under regulations adopted by the government of Ukraine.” The blockchain address of the digital transaction is written on the paper title deed so the buyer, Arrington, could go on the blockchain and verify the transaction there as well. Voloshyn revealed that Propy’s future transactions “will use a combination of the traditional and the digital depending on the different legal regulations of local governments.”
On June 9, 2021, Propy made history again after selling that same Kiev studio apartment as the world’s first real estate backed NFT. The NFT, a prime collectible asset with transferable digital ownership rights, was auctioned over 24 hours with the initial listing price starting at $20,000. The NFT included access to the property ownership transfer paperwork, a unique digital art NFT by a popular Kiev based graffiti artist named Chizz (a physical painting of the NFT is painted on a wall of the apartment as well), and a picture included in the apartment. Of course, the paperwork for the apartment is the main asset of the NFT sale. Before the auction, Arrington signed Propy’s proprietary developed legal documents for the real estate-backed NFT to transfer property ownership to all future buyers. Further, a U.S. based LLC was created and established as the owner of the property, meaning that the title for the apartment is held in the LLC. To streamline the transaction process, the bylaws for the LLC acknowledge that whoever owns the NFT would be granted all ownership and voting rights to the LLC. The way that Propy set up the LLC ownership allows the NFT to be transferred between a seller and a buyer without the need to change the owner, the LLC, on the actual property deed. In essence, the NFT acted as the vehicle for the real estate transaction through the LLC.
On June 9, Propy successfully conducted the auction on Seen Haus, an online NFT auction house (Propy has said that it will soon launch its own real estate NFT auction platform for future deals). The winning bidder, Devon Bernard, is a software engineer based in San Francisco. He paid a total of 36 Ethers or around $93,000, $33,000 more than what Arrington had paid four years ago, to win the world’s first real estate-backed NFT. Bernard won the NFT that gives rights to the LLC, and therefore, was able to claim ownership of the apartment through ownership of the LLC. The NFT transfers the property title via the LLC, and this process is repeated every time the NFT is resold to future buyers. Regarding the transaction, Propy’s CEO said that “This NFT will go down in history. For Propy, it is a major milestone in leveraging the promise of blockchain technology and NFTs to achieve self-driving real estate transactions and real estate participation in the decentralized finance economy.”
One major issue that Propy faces is that the NFT does not directly transfer the legal title between the seller and the buyer. To transfer property through an NFT auction, a U.S. based LLC has to be recorded with ownership of the property before the auction. This process gives the highest bidder the rights to the LLC and, thereby, rights to the property. Since the NFT sale does not transfer the legal title directly from seller to buyer, Propy’s approach results in several disadvantages. First, the specific legal paperwork developed by Propy has not been tested in court yet. If challenges to the NFT ownership transfer do not hold up in courts in different countries, then transferring real estate through NFTs would not be a viable option. Second, the requirement of having a U.S. LLC set up every time a property sale occurs means that the administrative efforts and costs of managing the property portfolio increases. For example, if a buyer wanted to transfer the property to other individuals or into other LLCs, then costs such as taxes and legal fees would arise in addition to the purchase costs. Lastly, the most significant disadvantage is that the legal regulations for NFT real estate transfers have not been implemented globally, limiting the new technology’s overall potential to disrupt the current industry standards. Propy conducted the transaction in Kyiv because government regulations in Ukraine allowed for such a transaction to take place, which is impossible in most parts of the world.
As the technology becomes more and more mainstream, many new government regulations and bans concerning the use of blockchain, cryptocurrencies, and NFTs have been established. Governments worldwide have become increasingly wary of cryptocurrencies because they are privately operated and highly volatile assets, posing a major risk to the financial and monetary systems. Furthermore, Bitcoin mining’s “energy- intensive computing process” is another top concern for governments because it could hinder global environmental sustainability goals.
Blockchain technology and NFTs in the real estate industry has and will continue to disrupt how the traditional real estate transaction process works. Tokenization of real estate could introduce more innovative ideas such as fractional ownership of a property that one can seamlessly transfer to someone else, similar to buying and selling shares of a public company on the stock market. Real estate-backed NFTs could also be the gateway for decentralized finance or DeFi peer-to-peer lending and borrowing on the blockchain with the real estate NFT being used as collateral to take out a loan against a property without a middleman such as a bank. By incorporating blockchain technology, more people would be able to access loans, and transactions would be more secure, transparent, and equitable. The future of real estate transactions has the potential to become truly peer-to-peer, with blockchain-powered platforms like Propy facilitating the entire process.
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