In late 2017 the discussion about blockchain, cryptocurrency and their impact on the real estate market was very much alive, fueled in no small way by the mania surrounding Bitcoin that had surged to over $19,000!
The talk of technological disruption extended beyond simply the use of the blockchain and alternative payment systems for real estate transactions, to other elements involved in the transfer and movement of real property including title insurance.
The question that was and is being proffered concerns whether utilizing blockchain for real estate records, ostensibly providing with 100% accuracy and certainty the chain of title, outstanding liens, etc., would eradicate the need for title insurance.
At the height of the blockchain/cryptocurrency ‘mania’ in December 2017, Hallmark Abstract Service offered its thoughts in the article, ‘Can Blockchain Technology Ultimately Eradicate The Need For Title Insurance In New York State?‘ This is an excerpt…
‘…From the standpoint of title insurance, anyone who has ever visited the real estate records archive in the various jurisdictions across New York State will likely tell you that an often non-computerized decentralized record-keeping system and a paper-based trail would make it extremely difficult to implement an historical blockchain.
But that said, would it possible to take the title analysis compiled on a property by property basis going forward to create a blockchain of ownership?
The caveat is that this would of course assume that any title analysis done and then put onto a blockchain was 100% correct and that no defects to the chain of title were missed (i.e. the title report is only as good as the title company creating the report).
Additionally any analysis would likely only be done as a real property was changing hands, meaning that a truly valuable blockchain would be decades in the making…‘
The following article presents the thoughts of Matthew Lopez, president and CEO of MBL Title in Dallas, Texas. Matthew regularly participates in panel discussions and speeches on blockchain technology, cryptocurrency and its effect on the real estate industry and can be reached at firstname.lastname@example.org.
Real estate transactions have endured the test of time with little to no changes in the last few centuries. Yes, for hundreds of years, buyers and sellers have entered into legally binding paper contracts, opened escrow accounts, conducted inspections, applied for bank loans, recorded transactions and deeds at the courthouse, obtained title insurance and signed what seems to be reams of paper at closing. But a major change is on the horizon, and real estate professionals across the world are taking note.
The highly complicated universe of blockchain technology and cryptocurrency is signaling a huge shift in the way transactions across a multitude of channels take place. Of course we’ve all heard of Bitcoin. By the time this article is published, it is likely that the first “tokenization” of a marquee real estate building will have already closed and funded. Think of it almost like a traditional stock where average investors and individuals buy “shares” of real estate. Therefore, selling and buying real estate doesn’t require large investments from one individual or group. Rather, the makeup of investors can range from the average “Joe” to deep-pocketed REITS.
Most people summarily associate blockchain technology with Bitcoin or another highly volatile and growing trading asset or “coin” – something they want to get into now under the FOMO (fear of missing out) mentality. The attraction is the notion that blockchain investing will lead to easy and relative fast wealth. However, very few investors actually know how Bitcoin and blockchain systems actually work. Cryptocurrencies are not backed or guaranteed by any government or commodity (such as gold or silver). Instead, the currency is tied to the security and tamper/fool proof designs built into the blockchain platforms making fraud and manipulation virtually impossible. Even if manipulation of these platforms were possible in theory, it would still be economically inviable.
When it comes to real estate, we are already seeing the evolution from the traditional way of executing a transaction to legal transactions solely using blockchain technology. In March 2018, the first U.S. property sold in Vermont entirely using the Ethereum blockchain platform. The first home in Texas to close using Bitcoin as a payment method sold in Austin in September 2017. Many more blockchain real estate transactions are in the works across the world including some very exciting tokenization of high profile buildings. Even “Shark Tank” investor Kevin O’Leary is in the process of tokenizing a prominent New York City hotel valued at roughly $400 million.
So what makes blockchain real estate transactions attractive? First and foremost—the trend from a notoriously “illiquid” asset to one that is highly liquid. In theory, that paradigm shift alone could truly increase the value of real estate by simply making it a more liquid asset. For example, even the IRS tax code recognizes the diminished value of an illiquid asset (e.g., shares in an obscure, private family limited partnership) versus a liquid asset (e.g., shares in a well-known, publicly traded company with a market capitalization and trading volume to match). Secondly, given blockchain technology’s provision of a “trustless” ecosystem and the resulting irrelevance of middlemen of all sorts, the entire “pie” in a real estate transaction will trade between the constituents of the transaction. Approximately 5 percent of the value of a residential real estate transaction is gobbled up in fees. These real estate “middlemen” include banks, attorneys, title companies, appraisers, and other government regulators and entities. The intermediaries have to verify the value of what’s being exchanged. However, with blockchain technology, everything is done digitally through the creation of digital scarcity and verifiable ownership of any digital asset.
Blockchain transactions begin with what’s called a “smart contract.” Whereas normal contracts are written and executed using attorneys and brokers, smart contracts using blockchain technology are actually written in code. The individuals are anonymous but the contract can be viewed in the public ledger on the blockchain. Once a triggering event is met (think of an “if, then” statement, also written into the code), the contract executes itself. Regulators and industry experts can monitor the market all while keeping the identities of the individuals involved in the contract private. The closest comparison of a smart contract in today’s traditional business arena would be any bills you set up on true autopay.
The key is in the code. Yes, it’s complicated. But you don’t have to completely understand what’s involved in completing a transaction. It’s just like the banking and credit systems of today. Few people know the inner-workings of the banks and their encryption systems. We know that we deposit a check and the money appears in our account within a day or two. The same philosophy will be the case with blockchain transactions, except the verification will occur in milliseconds instead of days. In addition, blockchain transactions carry much smaller transaction fees—if any.
You don’t have to be a computer science genius to use the system, but with this type of transaction comes several challenges. As many experts agree, blockchain systems are the next internet—the next wave of technology all transactions will be centered around. What we are seeing now is just the beginning of how we’ll be doing business in the near and distant future. As the industry changes so will the traditional “middlemen.” If they don’t, they will become industry dinosaurs. Even so, adapting to this new way of executing transactions will be difficult from a practical and regulatory standpoint.
At the same time, buyers and sellers will still need assistance. This is where I see title companies adapting to the new system. Title companies can play a vital role in building the infrastructure to effectuate the transactions and still act almost as a consultant, repository, transaction coordinator and responsible party of electronic records and the digitization of real property assets.
Another real estate challenge is transactions on the blockchain must be 100 percent funded. At this point, banks will not participate in transactions on the public blockchain platform that do not have all of the funding in place. Currently, banks/lenders will not allow their money (i.e., debt) to be used and their collateral secured on the blockchain. So, if a buyer needs a traditional loan, the transaction won’t work on the blockchain. Therefore, the complete transition from our traditional method to the blockchain will take some time. Banks will still play an integral role in real estate transactions for the foreseeable future as most real estate transactions are not all-cash transactions. But rest assured, the issue of creating a digital blockchain loan is in the works. In fact, many insurance companies are already exploring the collection of premiums and claim payments via a blockchain platform. For example, United Kingdom-based Blocksure is one of the driving forces in developing systems to transition the insurance industry to blockchain platforms. Bank loan origination may not be far behind.
While experts say blockchain technology is the wave of the future, many individuals will be hesitant and skeptical of its implications and functions. Understanding the underlying details is complicated, but more and more applications are being added that will make the use of blockchain technology easier to understand and more user friendly. At the end of the day, this technology will eliminate billions if not trillions of dollars in fees and services currently being charged today. That’s why one of my main missions is to educate more professionals in my industry of real estate. We must adapt and we must do it quickly.