Property should be embracing blockchain

Distributed ledger technology and tokenised digital assets are gaining traction in the real estate sector. The fixed and secure aspect to the technology, combined with its ability to disintermediate third parties in peer-to peer-transactions, makes it an attractive proposition for the industry. Moreover, tokenised projects are a popular means of producing liquidity. And so blockchain and digital assets are growing in their use in property start-ups, records management and construction projects where liquidity, accuracy and speed are often vital for the success of a project. Tokenised real estate start-ups store the value in relation to property by means of token issuance on a blockchain. Purchasers of those tokens then gain ownership over the asset through a digital asset, which consequently allows them to be involved in the property appreciation, and/or cash flow. The digital assets can be traded worldwide through other online markets (provided they accept them), independently of financial institutions with, in general, no minimum investment limit or lock-in periods. Tokenised real estate start-ups are popular since they allow smaller investors to participate in deals at only a fractional element of the asset price, lowering barriers to entry and eliminating traditional investment intermediaries, such as banks. Maintaining transparency Blockchain is particularly useful in relation to clarity of ownership – which is key to any property transaction. If land ownership has been registered on an immutable ledger, the seller is unequivocally the owner of the land and the potential for disputes is reduced. Smart contracts can also help to reduce transaction times, as procedures are replaced by automated processes. The use of distributed ledger technology is also being considered for construction projects, where all aspects of the project can be clearly and securely logged.  By detailing all elements of the project, it is easy to pinpoint where delays have occurred in the process, and/or any missing inventory. These two elements are often the source of litigious disputes in construction, potentially leading to wider economic loss. Any participation in tokenised schemes or investment in blockchain projects involves a large degree of risk, given this is a nascent area of technology shrouded in regulatory uncertainty. Blockchain technology itself is hugely expensive to build and to run, which may not offset the savings in time and cost it offers to the user. Unless there is regulatory certainty, scalability and mass adoption for blockchain and digital assets, these schemes continue to remain in the high-risk category. Future potential Although there is still a long way to go when it comes to UK regulatory acceptance for tokenised financial products such as real estate bonds (and our land registry probably is not updating its archives services any time soon), it is likely there will be strong growth at a global level in the use of blockchain in the real estate market.  In July, the first blockchain-backed real estate transaction was undertaken in Luxembourg, whereas in Germany, the Federal Financial Supervisory Authority has approved a blockchain-based real estate bond for security issuance, leveraging standardised financial instruments to build a real estate-backed asset.  Support for this trend, at a European regulatory level and by an established regulator that tends to take a traditional approach towards regulating its domestic markets, indicates change is on the horizon for the adoption of blockchain.  James Kaufmann is a partner at Howard Kennedy