By Denis Pavlov, Head of Partnership Development, CryptoProcessing by CoinsPaid
Edited by Bradley Peak
Foreword
The real estate industry in the EU and UK is actively evolving. According to PWC research, the transaction value growth from 2020 to 2023 was 83.33%. In 2023, 28.51% of transactions were made by foreigners, with about 72% of these coming from non-EU buyers. In this segment, alongside traditional forms of payment, alternative methods such as cryptocurrency payments are gaining popularity. As the volume of cryptocurrency transactions in the real estate sector grows, the importance of choosing the right method for developers to accept crypto payments increases.
Although cryptocurrency as a payment method has existed for over a decade, it took time before such transactions became subject to regulation. During this period, various unlicensed intermediaries formed an infrastructure for exchanging cryptocurrencies for fiat currency, which still plays a significant role in the real estate market today. Meanwhile, licensed crypto processing services have established a legal framework for crypto transactions, including converting crypto into fiat and depositing it into a merchant’s account.
The parallel existence of these two methods for accepting cryptocurrencies means that many market participants are unaware of the advantages of licensed processing over unregulated intermediaries. Additionally, they may not know the criteria for choosing a crypto payment partner.
Let’s compare these two methods in terms of potential revenue, fraud risk, support for high-volume transactions, and client profiles, while also exploring the criteria for selecting a crypto processing partner.
What impact does choosing licensed crypto processing versus an unlicensed intermediary have on a developer’s revenue, and what does game theory have to do with it?
The role of game theory
The relationship between a developer and an unlicensed intermediary for accepting/exchanging cryptocurrencies can be likened to the prisoner’s dilemma – a fundamental problem in game theory. This dilemma shows that rational players won’t always cooperate, even if it’s in their best interest, as each player prioritises maximising their own benefit without considering the advantages of others.
Imagine three participants in this scenario: an investor and two companies seeking investments. Each company can choose one of two actions, which, when combined with the other company’s action, leads to a specific financial outcome (1 million, 2 million, or 0) as shown in the table below.
PRISONER’S DILEMMA: GAME CONDITIONS | |
Take all the money for yourself | 1 |
Share the money with another player (with the assumption that they will reciprocate) | 2 |
Share the money, but the other player decides to take it all | 0 |
This creates the following outcome matrix:
LEGAL ENTITY 2 | LEGAL ENTITY 1 | |
LEGAL ENTITY 1 | (1, 1) | (3, 0) |
LEGAL ENTITY 2 | (0, 3) | (2, 2) |
Most participants, acting rationally, will choose 1 million instead of 2 million because, in the absence of trust and coordination, this suboptimal outcome provides half the income but remains balanced. An outcome where no participant can improve their situation without others changing theirs is called a Nash equilibrium. If the parties trusted each other and coordinated their actions, each would receive 2 million, which represents the Pareto-optimal solution.
In the relationship between a developer and an unlicensed intermediary, a suboptimal equilibrium is similarly formed: transaction costs for the developer remain higher than those of licensed crypto processors, and the unlicensed intermediary is unable to advertise its services openly, limiting its revenue potential.
Licensed crypto processing as an alternative
For developers, working with licensed crypto processing presents an alternative to the prisoner’s dilemma. Its legal status allows open business development, cost reductions through scaling, and ultimately, lower service costs in a competitive market. For example, with the average cost of apartments in Limassol in 2023 at €390,000 (according to PWC), and a transactional cost difference of 1.5%, savings on crypto transactions would amount to €5,850. A developer using licensed processing with lower transactional costs would therefore gain a competitive advantage. The higher costs associated with unlicensed intermediaries, due to their illegal status, are passed on to the buyer.
In this way, working with licensed crypto processing enables developers to avoid the prisoner’s dilemma and maximise their revenue.
Other considerations of note
While revenue is a critical factor, it’s not the only parameter to compare. Let’s explore a few other examples:
Fraud risk
Cryptocurrency exchanges via unlicensed intermediaries can lead to the loss of a property buyer’s funds if the intermediary fails to fulfil its obligations. If the developer recommended the intermediary, this could result in reputational damage. In contrast, licensed crypto processing services must adhere to strict regulatory requirements, significantly reducing the risk of fraud.
Large transaction support
For large crypto transactions, liquidity access is essential. Large licensed crypto processors can provide this, while grey intermediaries likely cannot. Attempting to break down a large transaction into smaller parts or relying on an intermediary without proper licensing introduces significant risks.
Expanding the customer base
As mentioned earlier, legal transactions can be openly advertised, leading to a larger customer base compared to competitors working with unlicensed intermediaries.
Which crypto processing service can be trusted?
When choosing a crypto processing service, consider two key criteria in addition to licensing:
Quality of service
Client references are invaluable. Current customers can provide insights into the pros and cons of working with a potential partner. It’s also important to ensure the availability of dedicated technical support, especially for clients unfamiliar with cryptocurrency transactions.
Public profile of the company
Crypto processing services are often featured in various rankings, including those of respected publications like Forbes. Awards and nominations, divided by industry or country, can also provide insights. Open-source analysis is a valuable tool when selecting a crypto partner.
Conclusion
In conclusion, both mathematical methods like game theory and practical experience show a clear trend: real estate developers are gradually shifting towards licensed crypto processors. These services offer profitable, legal, high-quality, convenient, and trustworthy solutions for accepting cryptocurrency payments.