There’s been a growing buzz throughout the tech world about blockchain technology and its associated topic of Bitcoin, the blockchain enabled digital currency. The specific characteristics of blockchain make it particularly useful for real estate transactions. In fact, there is a global real estate association dedicated to promulgating the advantages of blockchain technology. The International Blockchain Real Estate Association (IBREA) has over 400 members and is dedicated to advancing the advantages of the blockchain platform in the real estate industry for cost savings, operational efficiencies, fraud reductions, and conveniences.
In a recent article, the president of IBREA, Ragner Liftrasir, drew a vivid characterization of the blockchain platform. Lifthrasir wrote:
“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.” Ragnar Lifthrasir Realcom, March 29, 2016
What is blockchain technology?
Blockchains basically consist of a distributed ledger and a cryptocurrency. It’s essentially software and as such can be updated, stored, transferred, and all the things we come to associate with software.
When we hear the term “blockchain” we think of Bitcoin, but there are myriad versions of blockchain including Ethereum, and other versions.
What’s the expected impact of blockchain technology on corporate real estate?
Lifthrasir identifies four key areas in real estate where blockchain will have a major impact. These include:
b.) fraud prevention
c.) digital currency
d.) smart contracts
Most of the middlemen in a real estate transaction can be eliminated by the use of the blockchain. For example: “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 Linkedin.
In terms of fraud protection, blockchain technology, specifically Bitcoin, will have a major impact:
“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 Operas, February 6, 2016. Techcrunch.Com
Digital currency (Bitcoin)
Again quoting Ragner Lifthrasir:
“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. 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 spend. By using bitcoin, real estate escrows can be done more securely, quickly, and cheaply.”
The final area where blockchain technology will have a major impact for real estate is the notion of the “smart contract.” Again quoting from the Liftrasir article:
“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 publicly 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 publicly 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, InsideCounsel.com.
Recommendation for real estate: start planning now for blockchain technology
In conclusion, there’s no question that blockchain technology will revolutionize the real estate industry. Real Estate moves slowly with lots of middlemen and convoluted processes. Blockchain technology can address most of the issues with cost savings, efficiencies, fraud reduction, and speed. I encourage CRE professionals and managers to delve into the subject and identify how the blockchain platform can be used in your business.