What Is Blockchain And How Does It Apply To Real Estate?
Author: Ragnar Lifthrasir, President, IBREA
The internet made it possible for individuals to transfer information, quickly, cheaply and paperlessly without obtrusive intermediaries. Similarly, blockchain technology offers the same advantages for transferring VALUE. You use the internet to transfer words and pictures. You use blockchain platforms to transfer money and assets.
Blockchains basically consist of a distributed ledger and a cryptocurrency. When people say “The blockchain,” 85% of the time they’re referring to Bitcoin, 10% of the time to Ethereum and 5% to other projects.
The Blockchain will transform real estate in four ways:
2. Fraud prevention
3. Money 2.0
4. Smart contracts
Transacting real estate is cumbersome, opaque and expensive because of middlemen:
2. Government property databases
3. Title companies: Insurance and property databases
4. Escrow companies
5. Inspectors and appraisers
6. Notary publics
Do you like paying these six parties? Do you like waiting and depending on them? Bitcoin, Ethereum, and others can disintermediate many of them. That means cutting out the middleman.
Currently, these middlemen exist because they hold information that you can’t access or have skills/ licenses you don’t have that needed are needed to operate in the existing property transaction ecosystem. Public blockchains are a distributed database where anyone can record information, without it being censored, and without needing permission. Equally, anyone can access that information.
Let’s take title. County recorder offices and title insurance companies maintain various databases of property ownership records. This information includes the address, previous and current owners, and various encumbrances such as mortgages. Prior to the internet, the government and title companies were necessary to verify and record property data. How can Blockchain replace these middlemen?
Blockchain will enable every property, everywhere, to have a corresponding digital address that contains occupancy, finance, legal, building performance, and physical attributes that conveys perpetually and maintains all historical transactions. Additionally, the data will be immediately available online and correlatable across all properties. The speed to transact will be shortened from days/weeks/months to minutes or seconds.– Jason Ray, Nov 2, 2015 https://www.linkedin.com/pulse/blockchain-cre-its-all-speed-transact-jason-ray
But it gets better! Currently, the title to a property is a piece of paper. To transfer a property, you fill in the blanks on a deed, sign it with a pen, drive to a notary who puts their rubber stamp on it, and then drive this paper to the county recorder’s office to be placed in their database. Time and money wasted. Instead of a paper title, Bitcoin or Ethereum can create a digital title. This is a cryptographically secure token that can be transferred as effortlessly, quickly and cheaply as an email.
Before email, to send a letter you needed envelopes, stamps, trucks, sorting facilities, and postal workers to organize and distribute the mail. The digitization of messages disintermediated the mail middlemen. Once people can easily verify property records themselves and transfer a title digitally, brokers, escrow companies, title insurance companies, county recorders, and notary publics will follow the decline of the post office.
Real estate fraud is rampant. It’s perpetrated by petty thieves on $500 sub-leases up to the world’s largest banks and mortgage lenders doing hundreds of millions of dollars in transactions. Read the California Real Estate Fraud Report for a few examples: http://www.californiarealestatefraudreport.com/
Fraud is accomplished by forging paper documents such as driver licenses, bank statements, and deeds. Photoshop isn’t just for making celebrities look thinner. How can Bitcoin prevent real estate fraud?
By offering a 100 percent incorruptible resource, whereby the sender and recipient of funds was logged, and where “digital ownership certificates” for properties are saved, the blockchain would effectively make forged ownership documents and false listings a thing of the past. The unique “digital ownership certificates” would be almost impossible to replicate, and would be directly linked to one property in the system, making selling or advertising properties you don’t own almost impossible. – Don Oparah, February 6, 2016 http://techcrunch.com/2016/02/06/3-ways-that-blockchain-will-change-the-real-estate-market/
Bitcoin is a digital currency. Ethereum has its “Ether” token. Unlike the Dollar or Euro, blockchain currencies aren’t paper that are later represented by software, but are 100% software from birth. The power of software is its programmability. You can code it to play music. Without software, you’d need humans with guitars. The power of cryptocurrency is you can program it to escrow and distribute itself. With fiat (Non-crypto) money, you need humans and banks.
When someone rents an apartment, the landlord takes a security deposit in case the tenant damages the property. By law, he’s supposed to keep the funds in a separate escrow account and not spend it. Once the lease ends, the tenant has to rely on the good faith of the landlord to return the deposit. But if you’ve ever attended small claims court you know how frequently this human/trust-based system fails.
Bitcoin has a function called multi-signature. In bitcoin, you use your private key to approve the sending of the digital currency to another person. With “multisig,” you can create a transaction with three private keys, where at least two are required for spending.
Bitcoin can be used to create a programmable escrow. Instead of sending the landlord dollars to a bank account, the tenant and landlord create a multi-signature transaction. The tenant and landlord each has one private key, and a third one is given to neutral third party (Arbitrator). For the security deposit to be spent, two out of the three people will need to use their private key. The funds are locked in crypto-escrow for the duration of the lease.
The tenant will almost always want his deposit back, and so he’ll approve the transaction with his private key. When the lease ends, if the tenant didn’t damage the property, the landlord uses his private key to release that bitcoin deposit.
If the tenant damaged the property, then the landlord will send evidence to the arbitrator. The tenant can respond. After the arbitrator hears both sides, she will use her private key to send the deposit to the winning party. The bitcoin can be sent instantly, 24 hours a day, 7 days a week. No waiting on a mailed paper check or dealing with routing and account numbers and banking hours for a wire transfer.
By using bitcoin, real estate escrows can be done more securely, quickly, and cheaply. Bitcoin is Money 2.0 also because it’s censorship-resistant. China attempts to maintain tight control of its currency, the Renminbi. Citizens are restricted to sending the equivalent of $50,000 out of the country per person, per year. This year, Chinese families represented for the first time the largest group of overseas home buyers in the United States.
Bitcoin isn’t held in bank accounts but in a digital wallet stored on your computer or smartphone. My company meson.RE uses bitcoin to help mainland Chinese transfer funds to North America for real estate purchases.
Blockchain protocols such as Bitcoin and Ethereum have the ability to perform “Smart contracts.” This concept started with Nick Szabo. He gave the example of a vending machine which releases an item after a selection is made and the correct value is deposited. The goal of a smart contract is to reduce the need for humans to process and verify an agreement. A software protocol automates and self-executes an action when certain conditions are met. How could a smart contract be used in a property contract?
Examining a simple real estate transaction can demonstrate how smart contracts could drastically alter the way business is conducted. Presently, Party A and Party B would enter into a contract that requires Party A to pay $200,000.00 to Party B in exchange for Party B agreeing to convey title to Party B’s condominium unit to Party A upon receipt of payment. If Party A pays the money, but Party B later refuses to convey title, Party A is required to hire an attorney to seek specific performance of that contract, or to obtain damages. The determination of the outcome will be made by a third party: a judge, jury, or arbitrator.
Using a smart contract, however, avoids the potential for one party to perform while the other refuses or fails to perform. Using a smart contract, Party A and Party B can agree to the same transaction, but structure it differently. In this scenario, Party A will agree to pay $200,000.00 worth of virtual currency to Party B, and Party B will agree to transmit the title to the condominium in a specialized type of coin on the blockchain. When Party A transfers the virtual currency to Party B, this action serves as the triggering event for Party B, which then automatically sends the specialized coin which signifies the title to the condominium at issue to Party A. The transfer is then complete, and Party A’s ownership of the condominium is verifiable through a publically available record on the blockchain.
Structuring this transaction as a smart contract ensures that the transfer occurs as soon as funds are received, and results in a publically available, verifiable record of the transfer. Because the contract automatically performs based upon the predetermined rules agreed to by the parties to the contract, there is little risk of fraud, and virtually no need for external measures to enforce performance of the agreement. Thus, no specific performance action would ever be necessary to compel the transfer after payment is made because the coin, which represents title to the condominium, is automatically transferred, and the transfer is automatically published, to third parties on the blockchain. – Drew Hinkes, July 29, 2014 http://www.insidecounsel.com/2014/07/29/blockchains-smart-contracts-and-the-death-of-speci?ref=hp&slreturn=1459376129
Bitcoin technology is here. Wall Street is using it to issue stock http://www.wired.com/2015/12/sec-approves-plan-to-issue-company-stock-via-the-bitcoin-blockchain/ and transfer private securities http://ir.nasdaq.com/releasedetail.cfm?ReleaseID=948326.
It’s time for the sleepy real estate industry to wake up to the cost savings, efficiencies, fraud reductions and conveniences of blockchain platforms. The International Blockchain Real Estate Association (IBREA) has over 400 members dedicated to this goal and is proud to present the first ever conference dedicated to applying blockchain technology on May 17, 2016 at Newport Beach.
+1 I (that being me Duke Long) will be attending the conference in May and will be a featured speaker. Sign Up!