Distributed ledger technologies in real estate - Is there room for a transformation?
Lately, there’s been an undeniable focus on the applications of distributed ledger technologies, such as blockchain. "How can we implement this upward trend in our current transactions?" might be one of the questions that comes to mind. Though real estate transactions are widely performed across the globe, considering the nature of the transactions and related limitations (such as strict bureaucracy and formalities), you might not think there’d be a real possibility of blockchain applications in this field. So why is the real estate sector one of the earliest adopters?
The City of Miami (Florida, US) was courageous enough to be one of the first to implement this trend. The mayor made a proposal to allow people to pay property taxes or city fees with cryptocurrency1 and, in no time, a transaction of USD28 million for a penthouse occurred that was paid entirely in cryptocurrency.2 Risky move or just stepping into the future?
Although the real estate market sparks the interest of many individuals, companies and authorities, there are a few unresolved issues with respect to the traditional real estate industry:
- It’s not open to everyone, based on barriers regarding citizenship, international bank accounts, cash requirements, financing, accreditation.
- There’s a severe lack of transparency, since a significant amount of money is laundered globally through real estate – the UN Office on Drugs and Crime estimates this figure could represent 2-5% of global GDP. 3, 4
- High fees, mostly because of the sheer number of middlemen involved which, in turn, generates the need for exchange fees, transfer fees, broker fees, attorney fees, taxes, investment fees.
- The lack of liquidity.
- Transaction speed – it can take up to six months to find a property and another six months to fulfill all the necessary formalities to acquire it.
In Romania (like numerous jurisdictions around the world), rights and transfers related to real estate must be registered for enforcement purposes with a land registry. Given the characteristics of distributed ledger technologies, the question arises whether blockchain can be used as supporting technology for the land registry and whether this could solve (at least in part) the issues above. Blockchain immutably records data, while keeping the information (or part of it) publicly available. So the process of obtaining data related to a certain real estate asset that’s stored on the blockchain could become more transparent, accessible and fast. And ownership transfers could be recorded in a secure and decentralized manner, eliminating the need for at least some of the intermediaries (eg public notaries). So the reasons for the move to blockchain are set, but what are the real benefits and obstacles?
Moving the land registry to blockchain – what are the benefits?5
Single definitive property record
By moving the land registry onto the blockchain, the need for unnecessary duplication and introduction of multiple entries can be eliminated (for example, in Romania there have been multiple land registry systems over various areas, sometimes with conflicting and overlapping recordings). Subsequently, advisors and property managers will gain instant access to a transparent and complete record of a property, making conveyancing and property management more efficient. This will lead the industry away from the status quo in many jurisdictions, allowing multiple governmental authorities to each hold property records (eg environmental, planning/zoning, tax).
Great reduction of the potential for both fraud and human error
Any final change to a property record requires prior validation by the blockchain "miners" within the network. So the room for errors or illicit activity is significantly reduced, as there’s less need for human resources (ie officers in land agencies) who currently perform title searches or content checks of relevant deeds and update existing registers (often times with conflicting results). With the blockchain, all recorded transactions regarding property are protected by cryptography, a series of protocols that secure the network and transactions to ensure data privacy. Rather than a property registry that can be altered by making changes and deletions, the blockchain database can only be added to (and only by entitled individuals).
Eliminating uncertainty with respect to the transfer of title
Recording the transfer of ownership by and on the blockchain-based land registry will eliminate the registration gap that exists in many jurisdictions between the legal transfer of title following the submission of an application to amend a property register and the property register itself being updated. While more complex or evolved blockchains (such as the bitcoin network) do end up with increased confirmation times, these have still only reached a maximum of 6 hours 6(which is still significantly less than the existing registration bureaucracy) and, for the time being, real estate transactions are much less efficient than financial deals.
Power of example
While benefits could still be even greater and numerous (and potentially unimaginable at this stage), another convincing argument for the move is also one of the easiest to grasp – simply put, it works. Several countries (eg India7, the Netherlands8, Sweden9, UK, Columbia and Dubai) have already migrated their land registry systems to blockchain. Any country looking to implement blockchain can make use of their experience, rather than stepping into the unknown.
Potential obstacles to implementation
While moving to blockchain may seem like an obvious and beneficial solution (for the reasons stated above, but also potentially many more, depending on how convoluted the current system is), even its biggest supporters must admit that obstacles are to be expected during implementation.
As experience with other disruptive technologies and models has shown (eg Netflix), a shift to a blockchain-based system could face an initial lack of trust and reluctance and would require an effort from public authorities to provide clarity and transparency throughout the process, to build trust in the new system.
While this is also one of the key benefits of using blockchain, it could be argued that by implementing technology that significantly reduces the need for human resources, it will lead to an increase in unemployment. Although technology-related jobs tend to support wider employment, it’s estimated that one additional job in the technology sector generates 4.9 new non-technology jobs in the same city10.
As with any procedure, there are certain steps to follow and parties involved. If any party is unable or unwilling to participate in the use of new technologies, this might create a backlog for all others who have adopted the new system and, also, generate more chaos by having two systems that have the same purpose but different methods coexisting. One solution to this obstacle would be for the governing bodies to mandate the use (as is the case in Australia11) of such technologies. As also the case with digitalization of other public services and systems, this would require the government to provide access and resources to these systems, and guidance for their use.
New technologies have often overlooked existing regulatory frameworks. Some of them offer great technological solutions that cannot be initially implemented in the real world, due to lack of connectivity between the systems and real-world events, with a need for regulation to catch up and adapt to the fast-paced development of disruptors. For example, moving to the blockchain-based system would require the technology to adapt to the specifics of public sector real estate transactions (eg following a tender procedure with respect to assets that are owned by the state or by the territorial administrative units).
The need for progress, including technological progress, is obvious, especially in areas facing a rigid system (such as land registration). To be implemented, it needs to be understood, reliable and explained in a way that’s easy to understand. All related legal aspects should be taken into consideration and actively observed, transforming this process in a complex one, which requires cooperation of all actors involved. Nonetheless, there’s no doubt that real estate is already part of the blockchain revolution and continues to evolve beyond the most progressive expectations.
1 Miami Pushes Crypto With Proposal to Pay Workers in Bitcoin
2 Miami Beach’s Most Expensive Penthouse Just Sold In America’s Largest-Known Cryptocurrency Real Estate Deal
3 Gross domestic product
4 UNODC Research report on Estimating Illicit Financial Flows resulting from drug trafficking and other transnational organized crimes
5 G.S.S. Krishnapriya, ”Securing Land Registration using Blockchain”
6 How Long Does a Bitcoin Transaction Take?
7 Ministry of Electronics & Information Technology, National Informatics Centre
8 Blockchain to be tested by Netherlands Land Registry
9 Sweden tests blockchain technology for land registry
10 Will Robots Take Over Commercial Real Estate?
11 Australian senate committee calls for national blockchain land registry