Financial inclusion is a challenge faced in many emerging markets. Often traditional banks do not give credit to the bottom of the pyramid because individuals do not hold legal title (formal property deeds) to their homes, and are unable to post collateral to guarantee their bank loans. Even if they do own their home or plot of land it may be that the property registries are not updated or there are multiple registries and unclear titles (more than one person having the same title or legal claim to one property). Furthermore, corruption or gaps in regulation may allow for fraud so that transfer of assets and real ownership of assets is not properly reflected in formal property registries. It is not unusual to find one person’s name in the property registry (the owner according to law) and a complete different reality (someone else living on the property).
The situation is even worse in countries where the political situation is unstable and property rights are not fully respected (for example, one government can come along and expropriate rightful owners from their land). Corruption is an enormous problem in these geographies, so it may be the case that despite legal documentation being in order and solid purchase sale agreements in place, there is still a barrier for registration. Sometimes an administrative procedure is required to register property, and this process can be rejected by the registrar (for any reason) or purposely delayed so that in practice it is impossible to register property rights (unless there is some unofficial payment made). From personal observation, an unofficial “price” to register a property title in the south of Lima was US$100k (this means that in order to register property that is lawfully yours, you would need to pay this amount – akin to a bribe, or the registry would fail to give you the formal property deed and you risk subsequent transactions taking place and losing your investment). This unfortunate situation faced by many people in the developing world is what economist Hernando de Soto calls “dead capital”. De Soto’s main thesis is about the importance of property rights for the development of economies and how solid systems and respect of property rights acts as a catalyst for people to get out of the poverty trap.
Blockchain is a new digital technology that has the to potential rewrite the way land rights are currently recorded and enforced, and potentially play a major role in solving the problems described above. Blockchain was developed in the 1990s and first implemented in the 2008 with the invention of Bitcoin, a digital currency. At its essence, blockchain is a digital ledger of transactions, one that uses a digital network to self-reinforce and self-audit its digital record. It has been touted as “uncorruptible” by Don and Alex Tapscott, authors of the Blockchain Revolution, because the technology is not controlled by a single entity and has no single point of failure – i.e. it is decentralized, and uses the network ecosystem it exists upon to maintain transparency.
How does block chain really work? It all starts with a request for a transaction that is sent to a peer-to-peer network of computers or “nodes.” This network validates the transaction using a series of algorithms and integrates the validated transaction into the existing ledger of validated transactions. The term “blockchain,” comes from the idea that you are adding a block of data to the existing chain of data blocks.
You could use the analogy of a village or a tightly integrated social group to illustrate how transactions are conducted in blockchain. Someone requests a transaction, everyone in the village or group accepts and approves the transaction, and it is added to the status quo of how the community operates. The key difference is that these transactions are being made on the global arena, and all parties within the blockchain have equal access and voice in validating the information – it is an open source community.
While blockchain technology has been used with great success in the development of Bitcoin, today many different companies and organizations and exploring the use of blockchain to validate transactions in other arenas. It has the potential to impact international remittances, supply chain management, bring transparency to elections and governance, create smart contracts that could be used in everything from the music industry to crowdfunding, and indeed update and enhance existing land registry systems.
Consider the characteristics of the blockchain. If property titles can be recorded and stored on a blockchain it would solve many problems related to the clarity, validity and legality of property ownership and transfers. The owner of a property that is registered on the blockchain will transfer his or her property right and said transfer has to be verified, approved and settled by the distributed network. Once the transaction is cleared the buyer will be the new owner and this will be recorded and time stamped on the ledger and visible and verifiable to everyone. If the former owner attempted to sell this property a second time it would be impossible. The transaction would not be approved because participants would acknowledge that the person trying to sell is no longer the owner according to the ledger. Blockchain would allow for peer-to-peer transfers and minimal intervention from the government that would clarify titles, minimize corruption and in the long run improve the ability of those at the bottom of pyramid to access credit and improve their economic condition.
In 2015, Honduras was the first country to announce a blockchain based land registry system with Factom. In 2017, the Republic of Georgia launched a project with Bitfury Group and became the first country to secure and validate government transactions. Sweden also announced recently it would be working with the startup ChromaWay to integrate blockchain in their land registry system. Blockchain is providing a new avenue for governments and other organizations to work more closely with startups, and real opportunities lie ahead to boost financial inclusion through improved land rights.
Post by: Marijn GOEMANS, Zehra IJAZ, Mariam KAAN, Kiana MAGGIOLO, Shira STITES
Sources:
“Blockchain Technology and the Future of Land Registries.” 15 June 2017. https://btcmanager.com/blockchain-technology-and-the-future-of-land-registries/
De Soto, Hernando. El misterio del capital: por qué el capitalismo triunfa el occidente y fracasa en el resto del mundo. Diana, 2001.
Tapscott, Dan and Alex Tapscott. Blockchain Revolution: how the technology behind bitcoin is changing money, business and the world. 2016.
“The First Government To Secure Land Titles On The Bitcoin Blockchain Expands Project.” 15 June 2017. https://www.forbes.com/sites/laurashin/2017/02/07/the-first-government-to-secure-land-titles-on-the-bitcoin-blockchain-expands-project/#422406764dcd
“What is Blockchain Technology? A Step-by-Step Guide For Beginners.” 15 June 2017. https://blockgeeks.com/guides/what-is-blockchain-technology/
Being from Georgia, I know that the system was working quite well even before blockchain. Mainly due to the “Public Service Hall” reform. Government in the country is not corrupted and trying to implement innovative changes. Don’t you think it would be difficult to convince governors of corrupted countries to implement this system.
Thanks for reviewing a specific application of blockchain technology in land rights. As more adoptions by the general public, the database is growing exponentially stronger. However, as information could be powerful, in your opinion, what is the major risk or drawback for the information inerasability in the context of protection for underprivileged population?