Establishing a chain of title - Leveraging blockchain for the real estate industry

by Dentons
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[co-author: David Lui]

Establishing a good title and guaranteeing speedy acquisition of real estate is of paramount importance to investors, funds, and real estate developers. For example, if salient information on prior encumbrances, easements and restrictive covenants is not easily obtainable, land ownership disputes may increase transaction risks significantly. 

Uncertainty in property ownership globally may also be responsible for the loss of up to US$9.3 trillion in value. This uncertainty further hampers a party’s ability to lend or borrow against the property. Most of this “dead capital”, a term coined by Peruvian economist Hernando de Soto Polar, is primarily located in emerging economies. Land registries powered by blockchain technology may possibly bring this lost value into the mainstream economy, provided the information that is fed into the system is first verified and free from disputes.

Furthermore, in economies with reliable land registries, such as Singapore, the application of “smart contract” technology on a blockchain platform to automatically transfer land ownership upon certain conditions being met, could also substantially enhance its real estate sector. Transactions could be carried out much more quickly with fewer intermediaries, and potentially result in more secure ownership records. 

While some cities are moving quickly to adopt blockchain technology, such as Dubai (UAE) and Andhra Pradesh (India), others have adopted a wait-and-see approach. In Singapore, the financial services sector has been quick to begin testing the applications of blockchain technology – and the real estate sector may not be far behind.

Below, we (A) briefly explain what makes blockchain technology particularly useful for land registries, (B) discuss some ways in which this technology is being implemented in various jurisdictions, and (C) explain expected benefits and challenges when implementing this technology.

A. What is blockchain and how is it relevant to land registries?

A blockchain is a ledger (i.e., record book) in which a string of transactions are recorded in “blocks” and “hashes”. Any changes to property ownership in the land registry would be recorded in a “block” which contains a public timestamp. It would be impossible to modify an existing entry without modifying every subsequent entry that was made in that ledger, due to the connecting “hashes”. 

This would ensure an increased security of title, which would be highly valuable, especially in developing jurisdictions. This in turn will make property investment in such jurisdictions even more attractive to investors. 

The following features of blockchain technology are especially helpful in preventing fraud in a land registry:

  1. Sequential: To perform a fraudulent transaction, all the subsequent blocks in the chain must be re-written, not just the block denoting the target transaction. Any attempted modification would be easy to detect. 
  2. Unalterable: The information stored in each block exists in a permanent and unalterable state. A block cannot be added to a chain of blocks without validation through complex algorithms and peer-to-peer consensus.
  3. Decentralized: The blockchain exists as a distributed ledger that constitutes a publicly-accessible database where all users possess an identical copy. In theory, no one single or central database exists. Consequently, a single user (i.e. the database controller) is prevented from fraudulently and unilaterally manipulating the data.

Furthermore, when combined with “smart contract” technologies, blockchain-based land registries may significantly reduce the cost and time required to buy and sell real estate. “Smart contracts” are essentially electronic contacts embedded in the blockchain that would cause certain actions to automatically occur (e.g. the release of funds) when certain obligations in a contract are met. The use of smart contracts in real estate is a significant topic that merits discussion in a separate article.

B. How are various jurisdictions using blockchain for their land registries?

1. India

In October 2017, the government of Andhra Pradesh in India teamed up with a Swedish start-up, ChromaWay, to create a land registry based on a blockchain system for its new city of Amaravati. This platform will incorporate blockchain technology with next-generation database infrastructure, while allowing users to search through property records using a conventional search engine. 

2. Dubai

In October 2017, Dubai announced that it would migrate its entire land registry on a blockchain system which would record all real estate transactions as well as lease registrations.

An additional feature of Dubai’s blockchain system is that it also aims to connect these transactions and lease registrations with the Dubai Electricity and Water Authority and the telecommunications system and various property related bills. For instance, this system will maintain a tenant database which contains information such as Emirates Identity Cards and residency visas. This system would allow tenants to make payments electronically without having to write cheques. 

3. Georgia

In January 2017, Georgia announced that it would be migrating its land registry onto a blockchain system. The land registry interface would remain the same as most of the changes are intended to be made on the back end; the key difference being an increased confidence in Georgia’s land registry. 

4. Sweden

Since June 2016, the Lantmäteriet (Sweden’s land registry authority) has been experimenting ways to record property transactions on a blockchain, with the intention of saving Swedish taxpayers over €100 million a year by eliminating paperwork, minimising fraud, and accelerating transactions.

C. What are some challenges to implementing blockchain?

Developing countries with high growth potential would especially benefit from widespread use of blockchain technology in their land registries. However, governments face some common hurdles in attempting to implement these technologies.

1. Digitisation and accuracy

Before blockchain technology can be applied to land registries, land titles must first exist on digital platforms and not in manual records. For some jurisdictions, the process of digitisation may take time.

Further, in certain complex cases, historical records for a certain property may date back over many years (e.g. historical easements which could be recorded under the deeds system), and it may take a long time before such information is digitised.

Separately, given that blockchain technology merely ensures authenticity, not accuracy, bona fide errors while digitising the records (e.g., human error) may still occur even though the title itself is genuine.

2. Property ownership disputes

Ownership of titles registered onto the system must first be verified and free from disputes. This is something which may not be immediately feasible in developing jurisdictions where the courts may have backlogs in resolving ownership disputes.

3. Awareness and regulation

Given the pace of technological development, the difficulty may not be implementation but, rather, awareness. Legislators will have to consider how to ensure the accuracy of a database hosted on multiple servers, as well as how to regulate individuals charged with managing the database. In order for such change to gain support, the community will also have to be educated.

Conclusion

Notwithstanding the challenges facing its implementation, blockchain has immense potential to make property investment in both developed and developing jurisdictions even more attractive.

Will Singapore soon leverage blockchain technology to transform its land registry?

The Singapore Land Authority’s (SLA) Torrens system, which guarantees an indefeasible title for properties which are included in the register, is known worldwide to be extremely reliable and accessible.

Given the SLA’s constant pursuit of advancement, it is not inconceivable that Singapore may harness blockchain technology for its land registry in the near future, to even further enhance what is already a very reliable system. If so, coupled with the potential of smart contracts hosted on a blockchain system, the Singapore real estate sector may well look forward to yet another revolution.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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