Blockchain: How can the real estate industry take control?
The real estate industry is “ripe for the juggernaut blockchain revolution”, says real estate lawyer John Danahy. The only question is who will have a founding stake in the future landscape.
In early September, six major global banks, including Barclays, Credit Suisse and HSBC, announced a partnership to develop their own cryptocurrency using blockchain technology.
A blockchain is a complex set of algorithms that allows cryptocurrencies, the most common being bitcoin, to be traded and verified electronically and smart contracts to be executed.
Because the digital blockchain ledger is decentralised, with every entry cryptographically encrypted and dependent on the integrity of prior blocks on the blockchain, its records cannot be altered.
Importantly, the technology enables anyone to transact online with another person without having to go through an intermediary, like a bank or real estate agent.
“Blockchain has the potential to improve capital efficiency in financial markets and drive a frictionless process revolution in almost all areas of life where physical assets, like property and intangible assets, such as shares are exchanged,” Danahy (pictured), a partner with Squire Patton Boggs explains.
And when the real estate industry, the largest asset class in the world, estimated to be worth around US$200 trillion, is structured around various gatekeepers, blockchain’s ability to eliminate these has immense implications for the property industry.
“Title transfer is the real estate world’s settlement system,” Danahy explains.
“Equity, debt and legal title transfer could become as simple as many other online transactions, eliminating settlement risks and the delay between completion of a transaction and its registration.
“Proptech entrepreneurs and blockchain trailblazers criticise the dominance of the entrenched industry establishment – the estate agents and realtors, title insurers and the lawyers – with their vested interests in the preservation of the ‘age old’ system of title transfer that is out of date and stubbornly behind the internet age. And it is out of date.”
It may be an industry ripe for disruption, but blockchain technology is not without its challenges. As a former IT consultant, Danahy has unique insights into how the technology could intersect with the property industry.
The first challenge is the technologically-difficult task of shifting title transfer and land registration from a database, one which is usually state controlled, to a distributed ledger system.
“Because of the structure of blockchain, with each block built on the integrity of the last, all historic transactions across the jurisdiction would likely need to be recorded to the blockchain before new transactions could be added,” Danahy says.
A change to a purely online system may also require legislation in many jurisdictions, which is “clearly not impossible but requires the full support of the sovereign entity currently responsible for keeping the register”.
In Australia, legal title can only transfer by deed. Legal charges over real estate assets are also typically created by deed. Some jurisdictions, including England, Wales and Australia, require deeds to be executed by hand on a paper document. Other jurisdictions go further, requiring the in-person involvement of notaries. Legislative change would be required if blockchain is to eliminate the interface between the real and online worlds.
Driving standardisation is another challenge, but Danahy says “the real estate due diligence process would benefit from a more standardised approach, driving efficiency and moving the industry toward levels of automation needed to move to a ‘click, review, buy’ approach.”
Compounding these challenges, blockchain has its own new language. Concepts like ‘mining’, ‘proof of work’ and ‘smart contracts’ are all new.
“If the industry is to adopt blockchain, its concepts and language need to be understood by each stakeholder involved in the execution process. That or we need those who know to become integral members of the industry. A revolution indeed if we are to accept them into our collective enterprises.”
Danahy says the challenges are many, but not insurmountable.
Partnering between industry stakeholders and technology enablers is essential. Since early 2016, Standards Australia has been developing an open and transparent process for the development of international blockchain standards. And in April, Australia hosted the first international blockchain standards meeting.
Tackling blockchain and extracting its value requires focus, Danahy says.
“Much like the banks, the property industry has its establishment. Your time to adapt is now, before the proptech guys figure out how to do it without us.”