Most famous as the platform for the operation of Bitcoin, Blockchain has the potential to disrupt every sector in which it is employed – including the real estate market.
What is it?
The term Blockchain is composite – the “block” is a time stamped record, the “chain” is a string of those records. In the case of property, the initial “block” might be the identity of the first owner – the “chain” could be a record of each change to that owner.
A Blockchain is a “distributed ledger”, stored in multiple locations. Everyone with access to the ledger can update it and when they do, everyone else with access to the ledger automatically has their “copy” updated; the next “block” is added to the “chain”. Anyone looking at the Blockchain can see not only the current record, but also every change to the record on the chain. In addition, anyone attempting to fraudulently amend a record would need to update every copy of that record in the chain – the computing power this would require acts as a significant deterrent to fraud and, with lengthy or complicated chains, it can become practically impossible.
Why do you care?
So far, so abstract. Why should you be interested in this technology? Quite simply, properly employed Blockchain could change the way we think about real estate transactions.
Having a land register on a distributed ledger could speed up the registration process immensely – the ledger can be updated immediately on a purchase/lease/mortgage with all relevant information.
In addition the Blockchain can significantly cut down on property fraud. Each property would be uniquely coded and linked to a secure user key held by the owner. Short of theft of the user key, fraud in such a complicated ledger would be prohibitively expensive.
A number of governments are already exploring distributed ledgers for their land register, such as Sweden, Georgia and Ukraine, with trials already having been successfully undertaken. The UK government published a report on 19 January 2016 which recommended government departments move fast to adopt Blockchain technology.
Smart contracts are electronic contracts which automatically execute on the occurrence of certain events. As a basic example, in a property transaction the contract could be coded to automatically transfer title to the property on funds hitting the seller’s account.
The real cost efficiency comes when smart contracts are combined with a distributed ledger Land Registry. The seller and the buyer execute the contract on the ledger, the property ownership is immediately transferred and at the same time the smart contract is used to update the title register to show the new owner. In addition, one of the biggest legal headaches surrounding property transactions, the gap between completion and registration (which is required for legal title to vest in many cases), is wiped out at a stroke.
A landlord can manage their properties on a Blockchain ledger – any landlord with a significant estate will see an immediate benefit to having completely up to date information with smart contracts being employed to ensure proactive lease management with certain dates triggering action (such as an RPI rent increase).
Risks and issues
As with any disruptive technology, there are risks to be considered.
The user key may be secure as an access point but is still at risk of theft. An effective distributed ledger must enable users to verify that those on the other side of the transaction are who they claim to be and have the permissions to do what they propose to do.
In addition, a governance framework would need to be put in place dictating who takes ultimate responsibility for the data on the Blockchain. Currently the Land Registry acts as a guarantor of the data it holds – if the data is wrong, the Land Registry can be required to provide compensation. Would the government still guarantee a distributed ledger or, perhaps more accurately, how much control of the ledger would the government require before they would guarantee it?
Blockchain is still an unfamiliar concept to most – it will take time to build trust in both the technology and its security.
Blockchain is not a new technology and landlords may wish to explore the property management applications now, but the real benefits from a property perspective will come when it has been adopted widely. A UK wide distributed land register, with property contracts being executed as smart contracts, will create huge cost savings, shorten property transactions and make property fraud significantly more difficult.
In order to unlock the benefits of Blockchain technology, the government will need to follow the example of its peers and start actually trialling and stress-testing as soon as possible.