Escrow

What is Escrow?

Escrow is a mechanism utilized in various transactions to address uncertainties surrounding one party’s ability to fulfill the transaction’s terms. It has long been employed in property transactions, where funds are held by a third party until all necessary legal paperwork for a house is completed. Once this is done, the cash is released to the seller, and the house is transferred to the buyer.

Aside from property transactions, escrow accounts are also used in banking, intellectual property, mergers and acquisitions, and increasingly in cryptocurrency transactions. According to CipherTrace, the amount of cryptocurrency lost through hacks and scams has increased from $1.7 billion in 2018 to $4.5 billion.

Escrow is particularly advantageous when individuals want to trade assets from their digital wallets for cash but are unsure if the other party will follow through once the funds are sent.

While many escrow accounts can be automated using smart contracts on the blockchain, they are often overseen by service companies. The distributed ledger of the blockchain provides security, but it is not immune to hackers, human error, and unscrupulous investors who take on orders they cannot fulfill.

Escrow service companies act as third parties that temporarily hold and regulate payment in a transaction, ensuring that both the buyer and seller adhere to the agreed-upon terms. These companies charge a commission, typically ranging from 1% to 2%, which may be imposed on the buyer, seller, or both.

It is advisable to use a regulated firm whenever possible, as entrusting a third party with your funds is inherent in using an escrow service. Opting for a regulated firm provides the assurance of having a watchdog with the necessary authority in case issues arise.