Bitcoin and blockchain technology have been gaining publicity in recent years, and although they are primarily known for their use as a digital payment system, there are also promising uses in many areas where trust, cost and efficiency can be improved, including real estate.
So what is blockchain, exactly?
Blockchain is a distributed ledger system that maintains a continuously growing record of transactions, or blocks, where each block is linked to a previous block and cannot be altered or reversed once it is added to the chain, and which does not require a central administrator to guarantee the veracity of any transaction. It is essentially a technological solution to the issue of trust in a record or transaction. Blockchain is the underlying technology behind bitcoin, which is a digital token that allows one party to pay another anywhere in the world for goods and services, in some ways like cash. Just like a dollar bill, a bitcoin, once used, permanently passes to another person and cannot be reused or unilaterally withdrawn. With a dollar bill, this is because the bill physically passes to another party; with a bitcoin, this is because the transaction is etched in the public ledger and cannot be undone. Blockchain technology eliminates situations akin to receiving a blank check where there is no value in the underlying account or paying a seller for land that he does not own. Furthermore, because the transaction itself is secure, the cost of the transaction can be significantly lower when compared to traditional payment methods such as credit card payments, international remittances, or any situation where there is a third party guarantor.
The real estate industry is taking notice of these potential benefits. Real estate startups such as RealtyShares are accepting bitcoin as payment to lower transaction fees and to open the investment to international investors who often have to deal with complicated traditional structured instruments. Beyond using bitcoin as a payment method, the two major areas in real estate where some foresee bitcoin or blockchain being useful would be in searching for and establishing chain of title for property and in escrow functions for exchanges of value.
The current state of recording title or ownership of real estate is antiquated, fragmented and disorganized. For the most part, each individual county in the United States retains its own registry of title information that is usually difficult to search and closed off from other registries. There is tremendous potential benefit in attaching a chain of title to bitcoin or other distributed ledger system that can slowly expand to include all fifty states or even other types of property, such as fixtures, which are also filed according to a similar fragmented system. Of course, each county registry likely wants to maintain control over its own office and geographic area rather than cede control to a public ledger. Since title companies already maintain their own databases, it may be likely that title companies, rather than governmental bodies, begin to maintain a parallel blockchain database of title transfers which can exist for a transitional period of time until the county recording system becomes obsolete. Moreover, as certainty of title increases, the title company’s risk in providing title coverage decreases, and costs for title premiums should decrease as well. Startups such as Ubitquity are attempting to use blockchain to solve some of these very issues. The Cook County Recorder’s office, in partnership with blockchain real estate startup Velox.re, is also testing the use of the bitcoin blockchain for transferring and tracking title transfers, a system for filing liens, compatibility between a blockchain and a traditional, centralized system, and the prevention of fraud. This is significant not only because Cook County is the first registry in the country to test blockchain technology, but also because it is testing the use of public bitcoin blockchain (as opposed to a separate private blockchain). It will be interesting to see whether a working blockchain title system emerges from the private or public sector first.
Another area where blockchain would be useful is in verifying transactions. Currently, real estate transactions commonly use an escrow agent, perhaps the title company, broker, or other trusted neutral third party, to hold funds prior to closing. This third party must be trusted to safeguard the funds and to release them to the correct party once both parties agree or according to a set list of conditions if they do not. Blockchain technology may allow for multisignature transactions where once all required parties sign, or once verifiable conditions are met, funds release automatically.
There are numerous and complex concerns related to the use of blockchain technology in real estate, including questions of its actual security implications and ability to reflect the nuances of complicated transactions. However, the enormous potential of this technology demands careful monitoring and we will continue to do so.
On October 6, 2016, Goulston & Storrs sponsored MIT’s Real Disruption Conference on Real Estate Blockchain discussing the potential uses of blockchain in real estate transactions. Michael Casey, senior advisor at MIT Media Lab and blockchain expert, moderated the panel, which consisted of Avi Spielman, the author of Blockchain: Digitally Rebuilding the Real Estate Industry; Dan Doney, CEO of Securrency, and Christian Saucier, CTO of Ubitquity. Goulston & Storrs also hosted Dan Doney at its Real Estate Group Meeting on December 6, 2016 for a more in-depth discussion with our real estate attorneys.