FinTech

How title companies can exploit blockchain

Digital ledger technology promises more efficiency and security, but hurdles remain

Today, in most cases, land records can be obtained from across the United States simply using a computer to access the digital records of the relevant recorder’s office. In the past 20 or so years, there has been a complete transformation in the way business is conducted from paper to digital records. Another transformation in land records may occur as a result of blockchain technology.

Initially used as the underlying technology for bitcoin when it was introduced in 2009, blockchain is the foundational digital ledger system for cryptocurrency transactions that allows the movement of bitcoin to occur securely, efficiently, and, in certain cases, anonymously. Blockchain, or distributed ledger technology (DLT), is no longer simply limited to a means of protocol for digital payments; it is now being used in some capacity in nearly all industries.

The multiple characteristics of blockchain make it an incredibly attractive mechanism across industries. It provides an unchangeable, time-stamped ledger that allows for real-time and simultaneous input. It is the perfect set-up for industries where transactions are routinely moved from entity to entity or business to business and where records need to be verified and audited.

Naturally, therefore, in the world of title and real estate, blockchain provides an incredibly innovative platform, which would allow for land records to be added to a system of recordation that would permit access to such records in a more efficient, secure and transparent manner.

The Basics of Blockchain

Many people hear the term “blockchain” and do not understand the details of the technology. This process can be broken down into four steps as follows.

First, a user utilizing the DLT ledger makes an input transaction intended to add to the ledger. This value can be either a new transaction or a change to amend a prior transaction.

Next, the request is broadcast to every computer, or “node” as they are called, in the distributed group of computers on the blockchain network. This may consist of hundreds of different nodes and is not linked to just one server. Each node is not necessarily one person; it is not uncommon for companies to own an entire data room with computers (or “minors”) automatically working on a blockchain system.

Then, each node on the network must validate the transaction by using a series of algorithms, which will verify the encryptions on the transaction by checking its validity. The validation occurs electronically on the nodes, and not through one individual working on a computer scribbling down various mathematical equations.

Finally, once the distributed network approves the proposed transaction, a new block is added to the blockchain. This new block becomes an unalterable, permanent record. The only way to modify it is by adding another transaction; the history of the prior transaction, however, will never disappear from the ledger.

The entire process occurs without any physical transmission of documents or transfer of any paper currencies. While the earliest of blockchain transactions could take several seconds to complete, the newer DLTs are becoming faster.

Property transfers

There are several characteristics of blockchain that make this technology an ideal ledger and record-keeping system for property transfer, title and ultimately land recording. DLT technology permanently records the times and dates of every change made to the ledger.

In addition, the encryption method used for blockchain technology allows for very secure record-keeping, which is less susceptible to cyber breaches than other virtual tools. It would take a hack of more than 51% of the distributed network, occurring at the exact same time, for such a breach to occur. Finally, blockchain permits for central real-time access so that multiple people can access the same document online simultaneously.

The concept of distributed ledger technology generally means that there does not have to be an intermediary involved in the transaction and that such matter could be done in a “peer-to-peer” manner. For example, to effectuate payment, one could make payment directly without the need for an institution – like a bank, credit card company or a fintech solution such as PayPal.

As homes are sold, title is verified, and transactions are recorded, a process in which all of the information could be stored on a blockchain. If implemented, DLT would provide a streamlined process as these records are more efficiently retrieved and utilized, rather than transferred, among all of the various parties to the real estate purchase transaction. Ideally, the DLTs could include the Realtors, purchasers, lenders, title agencies, appraisers, home inspectors and all others involved through and including the land records offices.

The challenge is that blockchain is not intended to be implemented in a vacuum: It works best when there is an ecosystem of users that take advantage of a technology. In this ecosystem, there would be no need to transfer files. Those who need to review the ledger are able to access it – in some cases with “permissioned access” — and in others with complete transparency to all.

Therefore, the best use cases for blockchain implementation are for companies who are willing to invest in either being the first to move the market, or who are willing to become partners or vendors when the market movers are ready. This is similar to the way digital mortgage has grown to become a staple in the mortgage industry.

Land records

Understanding the characteristics of DLT, one can envision a property being recorded on the chain and having this technology act as a centralized land records database for property owners and title companies. The concept works in theory, however, in the United States, with over 3,000 land record offices that are often in small municipalities, the implementation is not practical.

In addition, with U.S. property history going back hundreds of years, blockchain doesn’t easily allow for this land history to be built into the chain.

But the technology has advantages that can be utilized in our current land recordation process going forward. The best implementation of blockchain at this point in time is to utilize the technology starting from today’s records and developing it into a robust system.

As the technology grows, so too will the ability to determine how to add in historical data. Twenty-five years ago county recorders offices were all paper. Perhaps 25 years from now (or sooner), county recordation offices could be interconnected via blockchain.

Use cases

Although blockchain technology is new, there are two prominent use cases that tested the use of blockchain for land records. The first was in Cook County in Chicago, followed by application in the South Burlington, Vermont, area.

In October 2016, velox.RE, a blockchain record keeping company, announced a pilot program in collaboration with Chicago’s Cook County Recorder of Deeds. The program essentially allowed users to digitally transfer bitcoin tokens, which represented the physical transfer of deed to real estate, thereby allowing for digitalized real estate transactions.

Title information for a property was put onto a fraction of a bitcoin, called a “colored coin,” and included digital title and deed information about the property being transferred. Ownership was effectively transferred by the seller sending the coin to the buyer’s bitcoin wallet. This conveyance was simultaneously recorded on the municipality’s public land records using this bitcoin blockchain.

The Cook County project used the bitcoin blockchain to immediately and directly transfer ownership of the property to the buyer using this as an electronic deed transfer system by allowing the blockchain deed to replace the paper deed. This differed from other international test cases due to the use of bitcoin blockchain, instead of a private blockchain.

While other programs were used to back up existing records on blockchain, this Cook County pilot allowed for new property ownership transfers to be conducted directly from buyer to seller.

Beginning in January 2018, another blockchain title project was launched in South Burlington, Vermont, to use the DLT technology to record real estate conveyances in the jurisdiction. This collaborative program between the South Burlington City Clerk’s Office and Propy, Inc., a California-based real estate marketplace, utilizes a decentralized title registry system to transfer property.

The South Burlington pilot program was launched on Feb. 20, 2018, and allowed Katherine Purcell, an individual with property in Burlington, Vermont, to use technology introduced by the program to transfer this property to her limited liability company for a nominal amount.

It demonstrated how the technology can be used for large-scale digital property transfers in the future because Purcell was able to do so rather simply across different entities in different locations. The town and the technology company are optimistic that this provides a manner of property record-keeping that will be both permanent and secure.

International land records

Outside of the U.S., several jurisdictions are either piloting or implementing blockchain as the technology used for land records, including Dubai and the Republic of Georgia. It should be noted, however, that many jurisdictions making these implementations do not have a comparable history of land recordings to that of the U.S.

Dubai officially introduced its “Smart Dubai” Initiative in December 2016. According to the website for the Initiative, its purpose is to “explore and evaluate the latest technology innovations that demonstrate an opportunity to deliver more seamless, safe, efficient, and impactful city experiences,” with the ultimate goal being to run all government transactions using blockchain technology by 2020. The Dubai Land Department (DLD) has stated that Dubai aims to be the first government in the world to completely adopt blockchain technology.

To realize this goal, the DLD has essentially set three different distinct phases. Dubai has already begun implementing the first phase as all land deeds are now being recorded on a central blockchain.

The next step is for the DLD to use blockchain to record all real estate agreements, lease or rental contracts, and property-related tax and water bills. The third phase will involve implementing a system that allows both citizens and investors to make electronic payments to any government entity at any time from any place.

In its formative stages, there is also a program for real estate titling designed and developed for the Republic of Georgia. A San Francisco-based blockchain technology company, The BitFury Group, is working with the Republic of Georgia’s National Agency of Public Registry and Hernan De Soto, a Peruvian economist, to create the program. Together, they are developing a blockchain-based property registry that can be used by the government for purposes of titling.

This system can be used to register property securely, but transparently, on the blockchain. The information added to this ledger will then be used to ensure that all property owned in the area is correctly titled so that the ownership of these properties can be legally enforced.

In addition to Dubai and Georgia, similar blockchain land registry programs have been developed for use by municipalities across the world, including Sao Paulo, Brazil, Moscow, Russia, and Kumasi, Ghana. While some of these programs have been more successful than others, they have all worked to bring innovative technology to land recordation.

Brazil, for instance, faces many challenges in implementing widespread blockchain-based technology in land-titling systems because the country’s population is extremely large and has many ongoing land disputes, including disputes between indigenous peoples who claim long-standing inherited rights to land and businessmen trying to now claim this land. However, Ghana’s Land Commission wants to solve the longstanding problem of land ownership transparency and thus, the commission has been very willing and helpful in implementing a blockchain land titling system.

The changing role of title agents

As blockchain transforms the land records industry, the question arises as to what this means for the change in the role of title insurance, agents and the industry as a whole. While this is not an easy question, clearly there may be a transformative change which would alter, but not eliminate, the role of those in the title industry.

The most innovative companies will get ahead of the curve, commence implementing DLT pilot programs, and determine how they can be front and center in this land recording ecosystem.

The initial implementation of blockchain would most likely be forward looking, thus there will still need to be title analysis done on the history for all historical liens and defects.

Could blockchain eliminate the actual need for title insurance because the entire property history would be transparent on this technology – and thus not require insurance?  Yes, theoretically the use of blockchain could eliminate a need for title insurance, but that would be far in the future when the entire ecosystem is on the DLT and our entire infrastructure has changed drastically.

Until then, title agents are still needed to dig deep for land history until the day when all the history and ownership of property is safely and securely placed on a blockchain ledger that could be assessed by the various parties to the transaction.

In the meantime, if those in the title industry embrace this technology to make their businesses more efficient, the roles and jobs may change, but they will not be eliminated. For example, the task of searching land records on a county recorder’s website may mean that the title underwriter must take a look on the blockchain and confirm that there is a complete record.

Title companies can still be front and center if they are able to continue to bring value to the consumer by providing assurance that the property record is clear and complete.

What about escrow officers who could potentially have their roles eliminated by smart contracts? Escrow officers essentially hold requisite documents and currencies needed for the completion of a transaction. In the case of real estate transactions, the title company often acts as the escrow agent as it only releases the required documents and funds, when necessary, according to the instructions provided by the party on whose behalf the title company is acting.

Since these holding services would not be required for future contracts, this role would likely evolve to encompass work associated with new features of a blockchain land titling system that will allow consumers to put their money directly in a blockchain escrow account. The role of escrow agents may slowly evolve into new roles needed in the areas of the real estate transaction process, including virtual real estate transaction coordination.

Home purchases using cryptocurrency

In addition to using blockchain, title companies are now having to address inquiries where home purchasers ask about buying or selling properties in cryptocurrencies. While it is not essential to use cryptocurrency in conjunction with blockchain-based real estate titling systems, it does further expedite and simplify the process, allowing for a more seamless digital transaction.

It is currently possible to purchase a home using cryptocurrency. The main requirement for a transaction of this nature to occur in a residential real estate transaction is the agreement between the buyer and the seller to exchange the cryptocurrency for the sale transaction of the specific property in question.

Bitcoins have been a possible currency for home sales and have been used in these transactions since about 2014. With a growing demand for this type of real estate transaction, a website called Open Listings has developed a means of browsing that makes it relatively easy to find properties that can be purchased using bitcoins or other forms of cryptocurrency. Open Listings is a free real estate listing website that allows prospective homebuyers to shop listings in their desired area, schedule private tours to visit the homes in which they are interested, submit online offers, and ultimately purchase their homes.

Despite the benefits to using bitcoin in home purchases, including its efficiency and clear and indisputable transfer, some major barriers to using bitcoins in real estate transactions remain.

Mainly, consumers worry about the unstable and ever-changing value of cryptocurrency in relation to different global currencies. However, after the bitcoin transaction has occurred, it is possible to almost immediately thereafter exchange the bitcoins received for cash to avoid the potential longer term risk associated with the fluctuating values of cryptocurrencies. Therefore, the barriers of using bitcoin for these type of large real property transactions can ultimately be overcome.

Looking forward

As with any new technology, it will take time to understand and implement blockchain’s role in morphing businesses and industries. The introduction of DLT is still new; everyday there are emerging blockchain developments, infrastructures and use cases. One thing is certain – the use of this technology is here to stay. Those that embrace it are going to be ahead of the curve, front and center, and critical to the ecosystems and customers around them.

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