Ledgers are Forever: How Blockchain Could Solve Several of Real Estate’s Perennial Problems

Arguably, blockchain is to 2018 what the iPhone was to 2007. Sexy, revolutionary, and soon to be such a common part of everyday life that it barely rates a mention. Where the blockchain industry falls on the hype cycle at this particular moment in time is difficult to say. Pride, as they say, comes before a fall (hello, Yahoo!, circa 2000).

But if you ignore the hype and really drill down into it, the use case for blockchain in land titles checks out. A blockchain is the closest we’ve come to developing a perfect, immutable ledger. Excited yet? You should be. Significantly, the World Bank estimates that 70 per cent of the world’s population still lacks access to proper land titling…”.

So while you’re toiling away readying yourself for the coming wave of mandatory electronic conveyancing (e-conveyancing), blockchain could fuel the next revolution in land titles here in Australia. It may be a few years away, but once the hype cycle moves to its next stage seeing this technology used to record land titles around the world wouldn’t be at all surprising. And that time spent toiling won’t be wasted. When a blockchain land titles registry integrates with e-conveyancing and a national digital identity system you could be buying and registering real property on your couch in your Ugg boots.

This article is part two in a two-part series. In part one, we explored how certain features of the registration and electronic revolutions made Torrens – and is making e-conveyancing – particularly efficient at rewriting the conduct of land transactions. This part explores how the same benefits (certain, speed and reduced costs) are present in real estate blockchain trials around the world and some of the obstacles to introducing it to Australian land registries.

Blockchain in land law

For anyone out of the loop, a blockchain is quite literally a chain of (ideally decentralised) data. It’s timestamped and secured by cryptography. Each block stores new data and references the previous block in the chain. In a decentralised blockchain, control of the chain is not centralised in the hands of a single party, entity or related group. This ensures that historical data cannot be changed unilaterally. Changing data stored in the chain is futile unless you can change the historical data in all copies of the chain at the same time (unless you’re the National Security Agency or North Korea, doing so is beyond unlikely).

A blockchain is a subtype of distributed ledger technology (DLT). DLT is an easier to understand concept that simply means a ledger, such as a traditional database, stored in multiple locations. Every location stores an identical copy of the same ledger. Not all DLT exist in the form of a blockchain.

In our proposed use case, a blockchain can be used to store the details of property sales, leases or mortgages – or any other data you want it to store. The creation or destruction of land is rare, and outside of Torrens jurisdictions, ownership is already demonstrated through a chain of title. Conducting a title search on an Old System block of land, for example, is much easier when historical data is immutably present on a blockchain. But a blockchain could be used in both a Torrens system and an Old System one.

Who’s playing? Blockchain’s real estate sandpit 

There are already players in the space you may want to be watching. Start-ups and entrepreneurs such as Propy (global marketplace) and Ubitquity (SaaS platform assisting government offices record land transactions on a blockchain) are looking hungrily at the potential for real estate transactions to be recorded on blockchain. Governments overseas are getting in on the action too. Pilot programmes are already under way in:

  • Vermont, United States. Vermont has given blockchain a warm regulatory reception generally, and issued what’s considered to be the first property deed using blockchain technology in April this year.
  • Russia. Russia is expected to test its blockchain-based land registration system this year.
  • Georgia. In April 2017, Georgia launched a project to register land titles using a private blockchain that is verifiable using the public bitcoin blockchain.
  • Brazil. Brazil’s antiquated land titles registration system is the target of a blockchain initiative collaboration between private industry and regional government groups.

India (through the United Nations Development Programme (UNDP)) and Sweden also have skin in the game, and their more advanced DLT and blockchain efforts can give us an insight into how such systems could work here in Australia.

E-conveyancing to DLT: the Swedish experience

The Swedes were already early adopters of digital real estate technologies like e-conveyancing, so it’s natural that the Swedish approach is to plug-in to existing digital platforms. Despite the already digital nature of real estate transactions in Sweden, a sale can still take between three to six months.

Sweden’s Lantmäteriet has been actively developing a DLT land registration platform since 2016 and testing it with volunteers’ property sales transactions. Sweden is one of the few developed countries seriously playing in this space.

Powered by local technology provider Chromaway, the Postchain solution used in the Swedish trial is a distributed blockchain-like database. Copies of the ledger are held by the land registry as well as other industry participants, such as banks. This month Lantmäteriet announced that it had completed the third phase of testing and development, and performed a live demonstration of the platform. The demonstration included digital signature verification and the final exporting of necessary legal contracts.

The Swedish DLT system has the potential to reduce transaction times to mere hours, and could save the Swedish taxpayer over USD$100 million a year. The solution provides more certainty, and is faster and cheaper for participants.

A reasonable counterpoint to the half central database, half distributed technology Swedish solution is that having the ledger in the hands of only a few industry players could make the system more susceptible to fraud than a full blockchain solution. Distributing the ledger amongst a few verifying participants means there are fewer copies of the ledger that need to be hacked simultaneously to verify and legitimise a fraudulent change.

Ethereum’s expedition in Panchkula

In India, the United Nations Development Programme has collaborated to build a blockchain powered land registry in the city of Panchkula. The UNDP believes that blockchain will have a huge impact in uplifting the poor and marginalised.

This system uses the publicly available Ethereum blockchain and focuses on smart contract integration.

The UNDP trial isn’t a fully digital solution. You still need to take a physical sale deed for registration at the local government services office. Once the deed’s particulars are entered into the system, the digital system kicks in. It’s registered on blockchain in the presence of the buyer and seller, their sign-offs are processed and the transaction is digitally pushed to the relevant approvals.

The UNDP writes that “[t]he blockchain engine simply works quietly but powerfully in the background”, with significant gains in transparency, accuracy and efficiency for administrators.

This is obviously an impressive initiative, but using blockchain with a public source code like Ethereum for land registrations in Australia might feel like a low-tech or budget option. It’s unlikely to garner the necessary trust and confidence parties to land transactions or willingness of industry players to participate (perhaps why Sweden chose the private DLT option). But there are already examples of the use of DLT here at home. It’s not a leap to suggest the programmes could expand further.

Lessons from home

The Australian Securities Exchange (ASX) is a great example of home-grown adoption of blockchain for reducing costs and increasing efficiencies in a government regulated service.

It’s leading the world to become the first fiat currency based securities exchange to adopt blockchain/DLT technology in its post-trade processing system (the replacement of the CHESS clearance and settlements facility). While not a government agency, the ASX is a regulated body and its example is prompting exchanges in other markets to consider blockchain technology (for example, stock exchanges in Toronto, Abu Dhabi and Frankfurt).

The ASX’s adoption of blockchain is also particularly pertinent to land titles when you consider that the ASX is partnering with a subsidiary of InfoTrack to create Sympli – an electronic property settlement service for lawyers, conveyancers and financial institutions that will compete with Property Exchange Australia (PEXA). Provided its application to become an Electronic Lodgement Network Operator is approved by the regulator, Sympli could be in operation by the end of this year.

It stands to reason that if the CHESS replacement launch goes well and the time required for clearance and settlement of trades reduces as expected, the ASX and Sympli would have a good case to show for a move towards a blockchain-based land titles ledger.

The replacement system for CHESS is based on a private distributed ledger blockchain technology, like the Swedish land titles trial, and is expected to go live at the end of 2020. It completed its final stage of public consultation within the last month.

This assumption that the Australian government might adopt blockchain technology for public ledgers isn’t just conjecture either. In the most recent budget the Australian government set aside $700,000 for the Digital Transformation Agency (DTA) to investigate ways that blockchain could provide government services. This is on top of the $92.4 million that’s being poured into the government’s digital identity system that could, one day, integrate with e-conveyancing, blockchain land titles and smart contracts to make our Ugg-boot-clad house purchasing fantasies a reality.

Australian blockchain barriers

The legal barriers to a blockchain land registry system include document execution and identity verification requirements. Though electronic signatures are widely accepted now, land registries in the states and territories still require a wet signature on a physical document before they can register certain transactions.

Verification of identity is a challenge for any electronic system, whether current e-conveyancing or future DLT based. You might already buy online using your fingerprint but the Australian government still prefers physical licenses, wet signatures and face-to-face contact to verify your identity. But this isn’t much of a barrier to the use of a blockchain solution for land titles. It just means that the initial solution will have to accommodate some real-world functions, like the Panchkula model, until the government’s digital identity system and bio-markers can replace physical verification methods.

The fact that Australian land registries are already digital (or will be by the end of this year) could make a DLT or blockchain system easier to implement, but it could make lobbying for the change harder in the wake of such a recent system overhaul. Blockchain might be agile, but Australia’s land titles administration isn’t. It’s predominantly state-based, and some are privatised. Getting everyone on board, even with the likely economic benefits, would take a while. Trials can also be lengthy (and probably should be) so it might be a few years.

The recent PEXA hacking scandal did nothing for trust and confidence in digital conveyancing. Despite the hackers exploiting a weakness in the conveyancer’s email system (not PEXA’s software) confidence in e-conveyancing is down. This could either hinder a move towards greater automation or bolster the argument for blockchain as a more secure technology.

People will also always be a barrier to automation where it affects their personal interests. Entrenched stakeholders and those who will lose their jobs will understandably not be on the bandwagon.

Keeping an ear to the ground

Like Torrens title, blockchain is a fantastically modern solution to perennial problems in an incredibly important industry. And like e-conveyancing builds on the Torrens system, DLT and blockchain can build on paper and e-conveyancing systems rather than replacing them.

For the moment, if you’re an Australian practitioner that works in real estate you don’t need to worry that current practices will be tossed to the wayside by technology, or replace your catalogue of real estate textbooks. But a future in which blockchain plays a key role in real estate transactions may not be far off.

This two-part series has looked at the features that made previous changes to land transactions revolutionary, and has provided a glimpse through those experiences to one reasonably foreseeable future of real estate transactions in Australia. DLT and blockchain could solve several of real estate’s perennial problems by further increasing certainty and speed, and decreasing the cost of land transactions.

Blockchain hype isn’t warranted in a lot of spaces. But the technology really lends itself to land registries, as the uptick in pilot projects around the world shows. Who doesn’t like the idea of buying a house in their Ugg boots? That’s revolutionary.

This article was co-authored by Edwina Oliver and Alexander Ross Davis, legal writers in the Practical Law Australia team

Practical Law Australia Commercial Real Estate provides detailed guidance in this complex, dynamic area of the law. Our expertly drafted resources help lawyers to decide what questions to ask, what law applies and why. To learn more about Practical Law Australia or to request a trial, visit the website.

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