Dubai's gamble on bitcoin property sales

In September 2017, the Aston Plaza & Residences development in Dubai Science Park began offering units in exchange for bitcoin.

They started from around 30, 50 and 70 bitcoin (each bitcoin was worth around $4,940 at the time).

The project’s developer, British entrepreneur Michelle Mone, claimed to have sold 400 out of 1,113 apartments in the first release phase.

More recently, Dubai’s MAG Lifestyle Development said it is ready to accept payments in Islamic cryptocurrencies, including onegram. The developer has also introduced a 5% discount for digital buyers in any of its eight current real estate projects.

“[Michelle Mone’s project] is more of a publicity stunt than a sensible business decision,” said Wes Schwalje, COO of Dubai-based Tahseen Consulting. “Though the initial batch of apartments sold out, the fluctuating price of bitcoin has forced the investors behind the promotion to pause a second release of bitcoin-priced apartments.”

He added: “Buyers who took advantage of this scheme when it was announced in September 2017 are likely experiencing a significant case of buyer’s remorse today.”

According to Schwalje, this promotion is an interesting real-world case where a cryptocurrency is being used to buy a physical asset, which is a first step in building trust in digital currencies as a payment mechanism.

Other experts are more circumspect, citing bitcoin’s speed and lack of transfer fees as a potential boon for the property market. Gartner chief forecaster John David Lovelock said bitcoin payments will make property sales “less expensive, less slow and less onerous”, but he raised concerns that bitcoin’s price volatility could be problematic for property buyers and sellers.

However, he added that there is “no reason” why Dubai couldn’t create its own version of bitcoin, which would make the currency more stable and allow for active volatility management, by limiting buyers and long-term holds. “There are a few countries already looking at this,” said Lovelock.

Oliver Nicholas Oram, CEO of UK-based blockchain services provider Chainvine, also takes a mixed view on properties sold for bitcoin.

“In terms of buying property with bitcoin, so long as value is seen in bitcoin and people are free to exchange it, then I could see this trend growing,” he said. “However, property and bitcoin have completely different types of volatility.”

The bitcoin property surge is indicative of a wider trend for cryptocurrency adoption in Dubai. The emirate is pushing to regulate bitcoin and other digital currencies with the aim of shaping the country into a global fintech hub.

Following Dubai's decision to categorise bitcoin as a ‘commodity’, the Dubai Multi Commodities Centre has started issuing licences to allow firms trading in cryptocurrencies to operate from its free zone.

The first licence for the free zone went to Canadian gold trader and storage provider Regal Assets. The company added cryptocurrencies to its product line at the end of 2017, offering brokerage services and an insured, high-security cold storage service for bitcoin, ether, bitcoin cash, ethereum classic, ripple and dash.

“Right now, the use case of cryptocurrency as a payment mechanism is not compelling, so Dubai’s decision to label cryptocurrency as a commodity is a decision rooted in necessity given the current maturity of cryptocurrency markets,” said Schwalje at Tahseen Consulting.

“Dubai is also following the lead of the United States Commodity Futures Trading Commission’s 2015 ruling, which was reaffirmed by a federal judge in early March 2018, that digital currencies are commodities,” he added. “However, whether to regulate cryptocurrency as an alternative to currency or as securities will remain an ongoing question for regulators, exchanges and investors.”

Oram agreed that labelling bitcoin as a commodity is the right decision for the time being. “After all, oil in a barrel is worth more than oil in the ground in theory because somebody has made the effort and taken the time to extract it and make it useable – many cryptos in the future could be judged in such a way once they become some kind of utility,” he said.

Schwalje added: “Dubai is also facing increasing pressure from Saudi Arabia and neighbouring Abu Dhabi as potential rival financial centres for cryptocurrency trading, which may have forced its hand a bit.”

According to Schwalje, cryptocurrencies are facing an identity crisis. “On one hand, there is a significant fear of missing out and on the other, cryptocurrency has a reputation as a tool for private, anonymous transactions between nefarious characters,” he said.

“Sensible, workable regulations are key to resolving this. A risk in our region is that regulators default to compliance and enforcement and shoehorning innovation into existing laws rather than developing sensible, workable regulations.”

The first bitcoin property sales in Dubai also underline the government’s wider commitment to blockchain, the ledger-based technology behind bitcoin and other cryptocurrencies.

The emirate’s bold 2020 Blockchain Strategy sets out goals for the technology that will create new industries and improve efficiencies in the government and existing industries.

Schwalje said: “The Dubai Blockchain Strategy and ongoing government pilots are a tangible commitment to embrace blockchain technology, but there is growing consensus that some of its use cases have risks. There is a real fear in governments globally that the hype surrounding blockchain is leading to speculation that might slow innovation.”