Micheal Arrington, the founder of the tech news website TechCrunch, recently bought $60,000 flat in Ukraine. Under normal circumstances, the transaction would have involved a trip to the country and exchange of paper documents. However, Arrington didn’t set foot in Ukraine. Neither was any courthouse, bank or other financial institution involved in the purchase. Everything took place on blockchain, the distributed ledger that underlies Bitcoin and other cryptocurrencies.
Blockchain originally aimed at providing authentic ownership and exchange of digital information without the need for brokers and middlemen. But the same technology is now providing a reliable method to record the transactions of physical assets, including land and real estate property.
In nearly all parts of the globe, the real estate industry is supported by outdated technology and processes. Most countries still rely on paper records to register land and property ownership. In many places, documentation is poor and held by entities that can unilaterally change the context of deeds and claims. The entire process of transferring and verifying ownership is costly, non-transparent, arduous and prone to fraud. Moreover, a lot of legal, cultural and financial barriers stand in the way of those who want to invest in real estate.
Proponents of blockchain believe the technology can solve these problems and introduce new models for owning and sharing real estate property. And without much fanfare, a host of blockchain startups are exploring ways to exploits the benefits of blockchain to reshape the industry.
Traditional systems ensure integrity of information by putting it in the hands of entities they trust. In the U.S., courthouses and city halls are charged with the safekeeping of land deeds. The UK entrusts the responsibility to the government-controlled Land Registry. In less developed countries, tribal and cultural leaders draw the lines. Should any of these entities turn corrupt and decide to change the records, there’s little the affected people can do to prove them wrong.
In contrast, blockchain protects information from tampering by making it public knowledge. The ledger exists and is updated on thousands of computers at the same time. This means anyone who wants to change the information illegally will have to compromise all those copies, which is practically impossible. Moreover, the blockchain is transparent and auditable. There are no gatekeepers of information and anyone can verify the history of recorded transactions.
Startups in different regions are working with local governments to leverage the technology to track real estate ownership. In the U.S., velox.Re, a company based in Orange County, California, is working with the the Cook County Recorder of Deeds on a pilot project to to store the county’s property records on the blockchain. “It can greatly reduce fraud, reduce transaction friction, and cut down on closing costs,” said Ragnar Lifthrasir, the CEO of the company, in an interview with Fast Company.
In Sweden, Stockholm-based ChromaWay has completed a similar project with the Swedish land registry. The Republic of Georgia is engaged in a project with blockchain startup BitFury to transition the registration of new land ownership records on its blockchain system.
There are challenges to the full implementation of blockchain in the ownership registry, namely the digitization of previous records, which are stored in different formats and scattered across different areas of jurisdictions. But blockchain evangelists believe it’s not an obstacle that can’t be overcome, and eventually nations will move toward using distributed ledgers.
A new way to invest in real estate
The current state of the real estate market involves a lot of red tape and costs, making the ownership of property only available to a rich few. Laws related to owning land are prohibitive in most areas of the world. Moreover, partial ownership through real estate investment trusts (RETIs) is opaque and costly and doesn’t put investors in control.
A number of blockchain startups are working on tokenizing real estate ownership to overcome these challenges and open real estate investment to more people. An example is BitProperty, a platform that enables property owners to register their property on the blockchain and issue tokens, digital currencies that represent a share of their property. When a person wants to invest in the property, they can purchase any number of its corresponding tokens on BitProperty.
Contractors and construction companies can use the BitProperty to raise funds for their projects by launching initial coin offerings (ICO). Anyone who wants to invest in the project can purchase the project’s tokens. In return, they’ll have proportional share of the value and revenue of the finished project in the future.
The tokenization model slashes the costs of middlemen and RETIs by managing everything on the blockchain. Furthermore, it’s transparent, which means anyone can verify how the proceeds from the sale or renting of a property is distributed among stakeholders. However, one consideration worth noting is that governments do not classify cryptotokens as securities. This somewhat raises the risks of such ventures, but on the other hand makes it possible for everyone to invest in a property without being hindered by local laws and associated costs.
ATLANT, another blockchain platform, is challenging the business model of Airbnb and Expedia by offering peer-to-peer rental on the blockchain. On ATLANT, There’s no intermediary to process payments and take a cut. Moreover, the history of every property owner and renter is transparently available on the blockchain.
The future of real estate
With the advent and growth of the Internet of Things (IoT) and the convergence of the physical and digital world, there will be new opportunities to leverage the power of blockchain. Blockchain can become the backbone of an ecosystem of interconnected smart devices that can make peer-to-peer exchange of information and services. This can open up possibilities such as the smart renting of land and airspace and the automatic verification of property ownership based on blockchain records.
But that’s for the future. For the moment, blockchain will make the real estate industry faster, more precise and more affordable.