Blockchain – to Replace Government in Real Estateby Sacha Huber May 27, 2016
When it comes to blockchain, the immutable ledger technology that underpins bitcoin, much of the limelight thus far has been on its potential to disrupt the finance industry. However, the transformation that real estate may experience from applying blockchain could arguably be just as profound. Unlike financial services, where technological innovation has largely been embraced in the pursuit of profit, much of real estate’s business conduct remains firmly stuck in the past. Many operating methods within the industry have remained unchanged for 50 years, if not longer.
What is a land-registry in a blockchain?
Land registry systems contain records of a country’s land transactions, and operate on centralized ledger systems at present, with the centralized entity normally being a government agency. At their best, the systems guarantee title of all land assets; however, in reality they provide incomplete security of tenure, are marred by corruption and frequently result in ownership disputes. In contrast, a blockchain land registry system would be decentralized.
This would mark a distinct improvement on the incumbent system, in that every authorized network member would have an authenticated copy of the registry, rather than just one centralized party. Given that everyone can see the records, therefore, the process would be more transparent, which again minimizes the potential for foul play. Removal of the centralized entity is also likely to be cheaper and more efficient – the operating cost of the land registry in England and Wales in 2013/14, for example, was nearly £240 million.
Ragnar Lifthrasir, who is President of the International Bitcoin Real Estate Association (IBREA), is among the pioneers in developing a real estate model which can operate on the blockchain. He identifies three specific uses of the technology in the industry – purchasing, escrowing and the recording of title ownership and associated transfers. Escrowing is perhaps the least developed idea currently, although ostensibly it would be similar to a common bank transfer, only in this case the transferable amount is first converted to bitcoins which are then put into escrow. Nevertheless, as long as both parties agree to use the blockchain over a government solution, Lifthrasir argues, then nothing can stop them.
What are the benefits?
A blockchain would allow someone to upload land title documentation to the network, which other users can record and verify if needed. This would provide proof that this person is the first owner of the documents, and decentralised network verification would prevent forgery. When it’s time to transfer title, the document simply requires ‘rehashing’ (encrypting) by the owner to prove he/she is in possession of the document.
During the actual transfer process, a ‘coloured coin’ system – which US stock exchange Nasdaq currently uses to settle securities – would be employed. A concept first outlined by Swiss computer scientist and Bitcoin core developer Mike Hearn, coloured coins are non-fungible tokens which provide the owner with private keys, thus allowing only the owner to transfer ownership while preventing fraudsters from corrupting the process.
The elimination of costs associated with title insurance and fraud, according to Lifthrasir, is the biggest advantage of using blockchain. This has been a persistent problem with the current system of centralised government records. Criminals are able to fake title ownership, often simply by using editing software to stipulate transfer of property ownership in their favour, and at negligible expense. Indeed, title insurance itself is a $20 billion industry, and Lifthrasir estimates that at present it is costing around $1 billion to combat title fraud.
Some argue for a replacement of the entire common law system, which currently requires a laborious examination process of public land records before a plot of land is transferred from one party to the other. Joe Dewey and Shawn Amuial, attorneys at US law firm Holland & Knight who specialise in real estate and finance, for instance, are in favour of replacing the government recording of deeds, mortgages and other instruments in land records with the blockchain, as government records are prone to human error and corruption.
Reducing Bribery and Corruption
Indeed, corruption within land registry has plagued much of the developing world, with insufficiently secure governmental systems being regularly prone to manipulation. Honduras is among the worst. USAid Land Tenure estimates that 80% of privately held Honduran land is untitled or improperly titled, while only 14% of citizens legally occupy properties, with less than a third of those citizens being officially registered. Land title disputes in Honduras have led to violent conflict and widespread fraud, with cases of the registry system databases being hacked into and bureaucrats being able to secure the most luxurious properties.
As a solution, US technology start-up Factom announced in May 2015 that it had agreed to build a secure land title record system for the Honduran government using blockchain technology, in conjunction with title software company Epigraph. Transferring land records onto the blockchain, therefore, could be a reality in the not too distant future.
In doing so, Factom CEO Peter Kirby believes that Honduras’ land registry system would leapfrog many systems in the developed world. Although recent reports suggest that the partnership has stalled, Factom is adamant that progress is still being made, so it may take longer for the project to come to fruition than initially thought.
Ghanaian NGO Bitland also claims to be developing a blockchain-based system for entering land title records, in a bid to correct for the numerous failed attempts by the government to develop a fair and efficient land administration system. At present, courts in Ghana are reportedly being inundated with land dispute cases.
Bitland hopes to reduce this burden, and will use the Factom/Epigraph technology, as well as satellites and GPS to verify the accuracy of plots of land. Buyers will also be able to discover the last owner of property rights and land ownership disputes, while the disputes themselves can be made visible to the network, thus ensuring greater security. However, as with Honduras, much work is yet to be done.
Registry system problems, moreover, are not solely confined to the developing world. The US State of Massachusetts has a specific court which has jurisdiction over the registration of title to real property, while in Canada, 95% of land in Newfoundland and Labrador is considered Crown Land, which results in land disputes regularly ending up in court. Kirby believes that the most important issue is for courts to have a true history of what has happened during such land dispute cases. Immutable records based on “evidence and precedent” will be instrumental in adjudicating land disputes, and can also then become part of the permanent record of the land, which the blockchain technology can ensure.
In terms of taking land title records away from government and onto the blockchain, it may prove to be more difficult in some countries than others. In the US, for instance, title companies exist and have large databases of land ownership records, in addition to the government’s own records.
The sheer number of landowners (and thus the number of records), coupled with the overall size of the US, makes the task of shifting from government records to blockchain a lot tougher. However, Dewey and Amiual point to the fact that title companies are likely to act as allies in the technology’s development, rather than enemies, especially if title insurance can still play a role in addressing those risks which are not eliminated by the blockchain.
Lifthrasir believes blockchain will offer significant improvements over the current government-administered system. It would allow the industry to avoid the inefficiencies that arise from the presiding record keeping practices used by government. While Kirby is willing to work alongside the government in the Honduran case, Lifthrasir does not think it is a worthwhile investment of people’s time to teach governments about blockchain. The opportunity to transact directly under blockchain means that the role of government becomes redundant.
Instead, IBREA’s intention is to gather together the real estate industry professionals who favour moving elements of the business onto the blockchain, especially operations pertaining to purchasing, escrowing, and recording of transfer of properties. As Lifthrasir puts it, “So, as long as people in the real estate industry start deciding to use the Bitcoin blockchain to record the transfer of properties, why bother with the delay, cost, and inefficiency of the government?” He is convinced that 2016 will be the year that title management moves onto the blockchain, and in turn, that the technology is developed enough to be used in the real estate industry.