Could blockchain make buying and selling property simpler?

HM Land Registry is looking into the potential use of blockchain technology as part of its Digital Street project. The aim of this is to “make buying and selling property simpler, quicker and cheaper through the innovative use of technology”, supporting the department’s aim to “become the world’s leading land registry for speed, simplicity and an open approach to data”.  At the start of October, HM Land Registry announced it was partnering with software company Methods, which would use R3’s blockchain platform Corda as it started the second phase of the Digital Street project. The aim of this phase is to explore how new technologies such as blockchain can help to develop “a faster, simpler and cheaper land registration system”.  But how would this work in practice? What potential benefits could blockchain technology bring and what issues will need to be resolved to make this a reality? What is blockchain? Blockchain is a type of distributed ledger, comprised of digitally recorded data in packages called blocks that are linked in chronological order in a manner that makes the data highly resistant to alteration once recorded. Typically, each node (namely, each operational participant) on the network contains a complete copy of the entire ledger, from the first block created – the genesis block – to the most recent one. The term blockchain is used generally to mean distributed ledger in most discussions, as well as in the media. But a blockchain is only one of many types of data structures that provide secure and valid achievement of distributed consensus. There is a distinction to be made between permissionless ledgers (public) and permissioned ledgers (private). Permissionless ledgers allow anyone to contribute data to the ledger with all participants possessing an identical copy of it. Permissioned ledgers, on the other hand, allow for distributed identical copies of a ledger, but only to a limited number of trusted participants who are pre-selected or subject to gated entry on meeting particular requirements. Blockchain technology underpins crypto-currencies such as Bitcoin and Ethereum. It also has a potential application to any situation in which records are held digitally and to transactions that ordinarily require third‑party verification. What advantages could blockchain technology bring to land registration? Blockchain presents clear advantages over the existing land registration system, specifically: Security: blockchain is considered secure and could significantly reduce property fraud. Records are cryptographically protected, with each property given a unique code and linked to a smart key held by the owner. The database is distributed across a network of computers, making it difficult to hack. Speed: changes in property ownership will be recognised almost instantly, speeding the time taken to complete transactions. Smart contracts could take this a step further and allow a transaction to be completed automatically when the specified contract pre-conditions (for example, payment of funds) are satisfied.  Cost savings: completing transactions more quickly and securely will inevitably lead to cost savings for land registries and the parties concerned. Further, having real-time property information available will enable better decision making and more efficient property management. Will it make the conveyancing process redundant? No. Although any change in ownership can be recorded instantly, parties will still want to carry out due diligence beforehand and agree the terms on which the transaction is to be completed. It is usually this part of the process that takes the time, and blockchain doesn’t eliminate the need for this. Blockchain may make it easier to access due diligence and title information about a particular property if such information is also recorded on the ledger.  How will it protect confidentiality? This is one of the biggest challenges. An advantage of blockchain is its transparency, in that it requires all network members to view and approve changes. In practice, this would be a largely automated process, with nodes checking that each transaction submitted to the ledger is valid and that the chain has not been corrupted.    However, it raises questions about control of access to data. Currently, most property ownership information is publicly available and it is unlikely that blockchain would restrict this further. Most likely, there would need to be a public site (like the current HM Land Registry website) where the public could access title information held on the blockchain. But steps would need to be taken to ensure that confidential transaction information (say, personal side agreements) are not made publicly available – whether by keeping this information off the blockchain in the first place or restricting access to it to specified members of the network.  Does it eliminate the risk of fraud? No. It has been argued it would be harder to hack information contained on a blockchain given there are multiple copies of the database. However, hacking is not impossible and for determined hackers the stakes will be temptingly high. There have been numerous high-profile examples of blockchain-based crypto-currencies being successfully hacked, including several this year. If there is a public-facing site through which the public can access property information (such as the HM Land Registry website) it is also an obvious target for hackers looking to perpetrate property fraud.  Is there a continuing role for HM Land Registry if blockchain technology is adopted? Yes, probably. In theory, blockchain removes the need for a “gatekeeper” because transactions can be processed automatically. However, it is likely that we would continue to see a role for HM Land Registry to verify transactions and provide public information on ownership. The current system of title guarantee (under which registered title is guaranteed by HM Land Registry) would also be something participants in property transactions would be reluctant to lose.  Are there any other hurdles to overcome? Yes. Legislative change would be needed to support blockchain transactions in a real estate context because, for example, some transactions can be effected by deed only. There will also be time and cost implications to HM Land Registry in implementing blockchain technology.  Are similar projects happening internationally? Yes – England and Wales is not unique in considering the use of blockchain to modernise its system of land registration. Countries, including Ukraine, Georgia, Sweden and Dubai, have all announced plans involving blockchain. The case for modernisation is arguably more compelling in countries that do not have an established and well-respected centralised system for land registration as we have in the UK. In Dubai, the government aims to secure all government documents on a blockchain by 2020. The Swedish land registry is also trialling the use of private blockchains in the registration of property transactions. The future Blockchain technology presents clear potential benefits that HM Land Registry is right to explore. But there are many challenges to overcome, not least of which is the need to demonstrate the advantages of a system based on blockchain over the regime we have in England and Wales. As the technology evolves, it is vital that our conveyancing process continues to keep pace. Main image © Michael Weber/imageBROKER/Rex/Shutterstock Sarah Brown is a senior associate in real estate at Hogan Lovells