How blockchain and distributed registries will transform the real estate market
The blockchain technology (English blockchain – “block chain”) has become famous thanks to Bitcoin – the cryptocurrency based on it. In everyday life, the word “blockchain” is also applied to other digital currencies and other projects – from the Everledger diamond registry to the Follow My Vote online voting system, but not all of these projects use the blockchain in a technical sense. In fact, they are united by the fact that they all implement the so-called distributed registry (distributed ledger or shared ledger) – a promising innovation that, in my opinion, will radically change the global real estate market in the next 10–15 years.
A distributed registry is a type of database. Like traditional bases, the registry can contain information of any kind – at least financial transactions, even family photos. Innovation is that copies of the registry are stored simultaneously with all its users and automatically updated. The reliability of the system is provided by cryptographic algorithms, thanks to which the entry made in the registry cannot be deleted or forged. The legitimacy of adding new records is achieved by the so-called consensus methods – these are also computer algorithms that differ from system to system, but perform the same function: prevent the technical possibility of data corruption (for example, due to computer failure or malicious intent).
In the report “Distributed Ledger Technology: beyond block chain,” prepared by the Department of Science of the UK Government in 2016, the blockchain and other technologies of distributed registries are called a breakthrough invention, comparable to steam engines and the Great Charter of Liberties.
I am sure that the introduction of these innovations will make the real estate market much more transparent, and the investments on it will be much easier and more affordable.
What the blockchain promises to the real estate market
Technologies of the distributed registry will be in demand in almost all real estate transactions, including the transfer of money, the registration of property rights and the conclusion of contracts.
Money transfer. Buying real estate for cryptocurrency, bypassing banks, has already become a reality. For example, in 2014, Bitcoins sold homes in Bali and Kansas, each worth more than $ 500,000, as well as a house in California ($ 1.6 million). In the near future, it is expected that blockchains will be used not only to pay for transactions in cryptocurrency, but also to transfer conventional (fiat) money, as well as national digital currencies issued by state central banks.
Registries of objects, transactions and property rights. Information about real estate, transactions, registration of property rights, encumbrances and the status of objects will be entered into distributed registries, access to which can be obtained from both desktop computers and mobile applications. Pilot projects of such systems started in several countries: for example, since 2016, the Swedish Land Registry has been conducting a large-scale study, the purpose of which is to find out the potential of the blockchain for transferring the land registry to this technology.
I suppose that soon every property will be able to get a “blockchain passport”, in which its technical characteristics are indicated. In particular, this will simplify and speed up the assessment of real estate, since now for each transaction it is necessary to re-order the relevant documents, and these “BTI references” cannot always be trusted. I think that both portals and MLS databases will appear, where objects will be accompanied by blockchain passports.
Smart contracts. So-called transactions and other contracts that are fully digital, and their execution (for example, the transfer of ownership from one owner to another) provides computer protocols without human intervention. The same protocols automatically check the possibility and legitimacy of the transaction; they will not allow the conclusion of the contract if its conditions do not meet the established standards.
The idea of smart contracts appeared back in the 1990s, but blockchain and similar technologies promise to bring smart contracts to the required level of reliability and security. Through such contracts, transactions for buying and selling and renting real estate can be carried out. In September 2016, British consulting company Deloitte announced that, in conjunction with the administration of Rotterdam (the Netherlands) and the Cambridge Innovation Center, it launched a pilot project on registration of lease transactions using the blockchain.
Escrow accounts are often used when buying and renting real estate. For example, landlords in the United States take a security deposit from a tenant that is stored on an escrow account, which cannot be withdrawn without the consent of the tenant. Now escrow holders are mainly banks and notaries, but distributed registries can change the situation. For example, when buying property during the construction phase, the buyer will be able to deposit money to the escrow account in the blockchain.