Written by Ernar Sagatov, Krystal Cho
A blockchain is essentially a distributed database of records or public ledger of all transactions or digital events that have been executed and shared among participating parties. Each transaction in the public ledger is verified by consensus of a majority of the participants in the system. And, once entered, information can never be erased. The blockchain contains a certain and verifiable record of every single transaction ever made (1). To hack this data, or attempt to fraudulently reproduce it, one would need to hack not one computer, but millions, and not just one “block,” but all the blocks, all running the highest level of encryption. (2)
Blockchain technology will bring a huge impact on real estate industry by changing the way that information is digitally stored and exchanged. Blockchain technology allows the creation of a public record (3), which means everyone on the platform can see previous owners and can validate transactions. The new way of storing and dealing with information will impact mainly two areas of the real estate business – property registry and transfer systems.
Reforming land titling system
The current system of recording deeds, mortgages and title encumbrances are outdated in most of the countries. In the United States, for example, interests in real property are tracked through paper filings into the “chain of title” maintained by a local governmental office. This is a manually intensive process, with a high potential for human error and fraud. For example, British government reported in 2011 that it has paid out more than ￡26m since 2006 compensating victims of property title theft, a crime that criminals take out mortgages on properties they do not own, pocketing the money and leaving the real owner thousands of pounds in debt. (4) To mitigate the risk, owners and lenders purchase a specialized insurance product known as “title insurance”, which incurs a lot of cost. (5)
With blockchain, greater transparency and real-time clarity into the ownership of and claims on properties can be provided. The online database of real estate built on public consensus will be easily searchable, combat fraud and will reduce costs, including title insurance premiums.
The potential for blockchain technology is huge especially in emerging countries where land record systems are antiquated or non-existent, which leads to delay, high fees and corruption. Kenya is testing a pilot with IBM whereby real property records will be managed on a public blockchain database. (4) More countries including Georgia, Honduras and Ghana started to review adopting blockchain into their land registry system.
Enabling Smart Contracts
The traditional transfer of real estate between two parties raises trust issues – possibilities of fraud, which sellers do not convey land rights to buyers upon purchase price reception. This issue is raised because of the inefficiency of land registry system mentioned above and lack of credible and visible platform that verifies the transaction. To reduce this risk, a purchase-and-sale agreement typically provides for a third-party escrow agent that receives the price from the buyer and the title deed from the seller. The transaction only closes when the escrow agent confirms that certain written conditions have been met. This process can be up to 2% of property’s value in form of fee (5), and has possibility of negligence or bad acts by the escrow agent.
Using blockchain platform for property transfer can significantly reduce this risk and incurring transaction fee. Encrypted, secure and distributed blockchain platform provides a way to execute transparent and quick transactions eliminating the necessity of third-party agents and paper processes that take days and weeks or longer. In 2016, the Dutch bank, ABN Amro, launched a blockchain pilot with IBM that is focused on real estate financing transactions with developers and investors. The platform, called Torch, will permit the bank, its customers, brokers the land registry office, the Central Bank and other regulators to conduct and monitor transactions.
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References
- BlockChain Technology (http://scet.berkeley.edu/wp-content/uploads/BlockchainPaper.pdf)
- Can blockchain title registry make property rights more secure? (https://www.globalrealestateexperts.com/2016/11/can-blockchain-title-registry-make-property-rights-more-secure/)
- The Use of Blockchain in Real Estate, (https://medium.com/@marcbhargava/the-use-of-blockchain-in-real-estate-7fa22abdda65)
- Property title fraud costs Land Registry £26m in compensation, the Guardian
- Blockchain: The impact on the Real Estate Industry (pillsburylaw.com)