Comment: Blockchain is a broad term that refers to software technology that enables an encrypted electronic ledger to be updated by multiple parties working through some form of consensus system, writes Lewis Rinaudo Cohen.
This means that each update of the ledger “state” is chronologically linked to the state that preceded it, creating an immutable record of all transactions that have occurred. What is recorded on the ledger can vary from system to system.
The best-known blockchain is the one that maintains the ledger for Bitcoin, the world’s first cryptocurrency. But there are many uses of the technology in the same way that email is just one use of the internet.
Still not sure how it applies to you? Here are just some of the ways the real estate industry can benefit from blockchain.
Bespoke platforms
Blockchain technology can be highly tailored to the needs of the user group utilising it. Blockchain platforms can be open to the public or they can be limited to a set of participants who are granted access to the ledger through a predefined protocol or the approval of an administrator.
Whichever approach is taken, a copy of the ledger (or at least portions of it) is saved on every computer that is linked to the blockchain network and any data that is placed on the blockchain is validated by the participants through a specific consensus model that applies to the network. The validation process will establish the trust required to transact remotely without the need for a third-party intermediary.
Thus, the use of a blockchain platform can result in lower cost, greater certainty, a dramatic reduction in counterparty risk and, often, faster execution and verification of information (and in the real estate context, reduce the need for various third parties, such as brokers, title companies, escrow companies or notaries public).
The use of this type of consensus mechanism can also greatly reduce the amount of fraud and mistakes that can arise through the use of manual documentation. The requirement for agreement by consensus makes a hostile attack intended to corrupt the contents of the ledger almost impossible.
Blockchain can also facilitate the use of “smart contracts”, which are computer programs that allow for business agreements to be executed automatically when certain conditions are met. An example would be a lease or utility pursuant to which one party pays another party an agreed amount depending on certain variables. Such payment could be automated in much the same way that, with a standing instruction, your bank pays your utility bill, no matter what amount it may be in a given month. Smart contracts would reduce the friction of doing the transaction and make real estate more transparent and liquid
In an environment where even the most basic of transactions have become costly, time-consuming and stressful, often involving numerous low value-add intermediaries, commercial real estate seems like a perfect place to take advantage of the benefits of blockchain technology.
An immutable record
By maintaining an immutable record of property ownership, encumbrance and conveyance, blockchain can provide a certainty of information that allows for a greater level of trust and transparency. It can allow each piece of property to have its own digital address where all information relating to the property may be stored.
This would include financial information, leases, taxes, bills, liens, easements, building performance, physical characteristics and the transaction history relating to the property, potentially eliminating the need for expensive in-depth title searches.
Crucially, all property-level information can be encrypted in such a way that only those with permission by the property owner (or agent lender, in the case or a mortgage loan transfer) can be allowed access.
A blockchain-based distributed ledger could provide the foundation for a more universal system across multiple geographic locations with a standard method of recordkeeping and an efficient, possibly nationwide, system of collecting and maintaining property information and documentation.
In addition, we see a significant potential benefit to commercial real estate financing. Starting with loan origination, blockchain facilitates prompt and accurate record keeping and document filing. Then once a loan has been booked, the system can be used to track borrower payments, covenant compliance and other loan activity, with smart contracts working to enforce obligations and identify defaults, potentially reducing mortgage servicing costs, in addition to assisting in syndications, securitisation and servicing.
Modernised record keeping
Local title recorders offices are already starting to think about how to modernise their record-keeping systems that, in many ways, are still working off versions of 19th century “tech”. In one example, Chicago’s Cook County’s Recorder of Deeds partnered with blockchain start-up velox.RE to develop a system to effect title transfers on the blockchain.
Globally, Sweden, the Republic of Georgia and India have all been looking to integrate blockchain into their land registry systems. Once governments adopt the blockchain for keeping land records, building upon that will be a natural extension to address all aspects of real estate.
Although the potential for blockchain technology in the commercial real estate industry is huge, it may take years to fully develop. Sgnificant work is being done to address underlying challenges such as platform design, local county-level adoption, handling the required transaction volume, and data security and storage requirements.
As we have seen in so many other sectors, disruption through technological innovation can occur much faster than incumbents expect and the time is now to focus on future possibilities.
Lewis Rinaudo Cohen is a partner, Lee Samuelson is a partner, and Hali R Katz is a professional support lawyer at Hogan Lovells’ New York office
