Will Blockchain Transform the Real Estate Industry?
When the economy took a nosedive back in 2008 and the country was on the brink of a dismal recession, the concept of cryptocurrency took hold as a means of safeguarding ones’ money without having to involve a trusted bank or other third party. What evolved from this near disaster were Bitcoin and other digital currency companies who eliminated the need for a third party and proclaimed that all transactions were safe and anonymous.
While investors valued Bitcoin at $112M in September of 2018, it has dropped significantly and is extremely volatile. The biggest draw of Bitcoin is that a transaction can’t be altered, erased, copied or forged. That includes both public and private Bitcoin ledgers. But only a few property transactions utilize Bitcoin as currency and that isn’t expected to change anytime soon.
Blockchain - Another Type of Ledger
Bitcoin is considered a centralized public ledger technology that is built on a secure network of computers. It enables transactions between parties using online payments that don’t have to go through a financial institution. There are also private ledgers that lend themselves to other types of transactions between individuals.
What is blockchain? Remember, it’s a technology used by Bitcoin but it is also a technology that works on its own. Basically, it’s a chain of cryptographic signatures chained together. In simple terms, it’s a growing list of records that are linked together using cryptography. It provides a way for untrusted parties to come to agreement on a common digital history.
That’s very important, because many digital transactions and technologies are easily faked and/or copied. Blockchain eliminates that problem without having to use a trusted intermediary, like a bank for example.
Bitcoin relies on blockchain technology for several reasons. First, Bitcoin is a public ledger of all Bitcoin transactions. Untrusted nodes are recording those transactions and can jeopardize their integrity. In addition, Bitcoin doesn’t want to trust any third party to administer the ledger.
Bitcoin effectively eliminates the middleman in financial transactions by decentralizing payments. That database technology can also be applied to other types of transactions. One possible application is real estate
The entire land title process had traditionally been one of paper transactions. Until now, real estate and blockchain have not worked together. Now, there is strong interest in the use of blockchain that would make title registration both easier and faster. It would also make it less expensive for municipalities that manage the land title registration process.
In my podcast with DJ Scruggs, CEO of BlueSpruce elaborated on the concept of using blockchain in the real estate arena. As blockchain is a distributed network, no single entity can take control of it, so no single player can shut blockchain down.
As DJ Scruggs points out, there is a risk of using blockchain in real estate, because a transaction using cryptocurrency can actually disappear. The money will be recorded as a transaction and money will be deleted from an account, but if any part of the 64 encrypted character string is incorrect it won’t be delivered to its intended destination. It is simply “lost” in cyberspace. To avoid having risks with cryptocurrency, more safeguards need to be in place and it needs to made as safe and easy as sending an email.
Scruggs feels that at some point Google or other startup will find a way to mitigate of completely eliminate the risks of cryptocurrency being lost and make it much easier to use. At that point more people will use Bitcoin and other cryptocurrency for real estate transactions.
It should be noted that there is security built into a blockchain system thanks to the distributed timestamping server along with a peer-to-peer network. The result is that the database is autonomously managed in a decentralized way, making blockchain ideal for recording events - like land titles, while proving permanence.
In addition to the risk of lost cryptocurrency, the SEC is ambivalent about how they treat assets. Currently, there is not a single syndication that allows the use of blockchain technology, which would be relatively easy to do as most syndications use documents printed on paper.
A new system helping to revolutionize real estate title registration called “Propy” is at the core of promoting the utilization of blockchain to decentralize title registration. They are a global real estate store and decentralized title registry platform. Their system consists of three components: a listing platform that allows sellers to list property information and buyers to search for properties; a transaction platform using blockchain so users can send paperwork, payments and records, and the Registry, which is at the core of the platform.
The Registry stores land records on the blockchain by implementing smart contracts. Propy’s goal is to allow users to purchase properties through the blockchain, eliminating the paperwork and mediation that is especially helpful in global real estate transactions. It should be noted, however, that Propy doesn’t want to eliminate the current system, but rather to work with it.
The international market is exploding. Between 2009 and 2016 the demand for cross-border real estate transactions soared 334% from $65 billion to $340 billion. That’s why Propy’s focus is on global markets. Once ownership is registered with various municipalities records can be amended, but they can’t be changed. This eliminates problems that have historically plagued cross border real estate transactions.
A Closer Look at Blockchain
Even though Bitcoin’s transaction records are publicly available, no single entity (like the US government, for example) can shut it down, freeze any funds or reverse a transaction. However, law enforcement agencies can now link Bitcoin transactions to specific individuals, so the concept that Bitcoin is anonymous is simply not accurate.
Another problem with the Bitcoin blockchain is that it’s not compatible for others to build apps or processes. So other companies are building blockchains for companies interested in the blockchain technology build processes. One such company is Ethereum. They also have their own cryptocurrency called “ether,” but specialize in smart contracts.
These are contracts that automatically execute when specific conditions are met from all participating parties. Because it’s automated, it helps to speed up the process, while ensuring that no errors occur along the way. The company is hoping that companies who use their blockchain will also use their cryptocurrency.
The problem is that there’s uncertain regulation related to smart contracts, and existing regulations don’t currently cover smart contracts. While a lot of progress is being made, there are many regulatory hurdles to overcome before blockchain and smart contracts are adopted on a wide scale.
One of the major criticisms of blockchain is slow transaction speeds, along with a lack of standardization. The speed issue is being addressed by a new model called “proof-of-stake” systems, where an individual is required to have a stake in the digital asset in order to participate in the network. This is helping to significantly improve blockchain speed.
The lack of standardization is an ongoing problem as there are many different coding languages, consensus mechanisms and privacy measures being employed by different blockchain developers. The good news is that industry participants are currently working to achieve cross-blockchain transaction and standardization. In addition, hundreds of members are working to create a standard version of blockchain.
Cloud Technology and Blockchain
Many users find blockchain technology complex. There are a variety of factors that contribute to this, including those already highlighted like lack of standardization, for example. However, inroads are being made.
Many major firms, including Amazon and IBM are working to lower the cost of using blockchain networks by utilizing cloud technology. These companies are focused on creating “blockchain-as-a-service” - where they offer templates to make it easy for developers to set up blockchain networks. The cloud providers hope these templates will help to automate the setup of basic blockchain infrastructure, reducing application development time from months to days.
There is no question that blockchain can surpass paper transactions when it comes to land titles and other paper-based work. It’s faster, easier and less expensive. But blockchain has many problems and risks associated with it, including transaction speeds and a lack of standardization. However, all of these issues are being addressed and hopefully will enable blockchain to thrive in real estate transactions.
About the author
Ellie Perlman started her career as a commercial real estate lawyer, leading commercial real estate transactions for Africa-Israel, Israel’s largest development company. Later, as a property manager for one of Israel's most prominent oil and gas companies, she oversaw properties worth over $100MM.
Ellie is the Founder and CEO of Blue Lake Capital, a real estate investing firm specializing in multifamily investments. At Blue Lake Capital, Ellie helps investors grow their wealth and get double-digit returns by investing alongside her in large multifamily deals they usually don't have access to.
Ellie is a Forbes author on real estate investing, the host of the podcast That REllie Happened?! Unbelievable Real Estate Stories and a writer of a weekly blog you can find at www.ellieperlman.com.