Blockchain and the UK Property Industry
29 October 2019
Since 2015 there has been a growing body of commentary extolling the virtues of blockchain and how it could, and in all likelihood will, revolutionise the property industry. The fact that I (a commercial real estate lawyer and not the most tech-savvy of individuals) am writing a piece about it demonstrates how blockchain is becoming more mainstream but, I wonder, is all this talk of “revolution” a little excessive?
So, what exactly is blockchain?
Steven Lang, a Commercial Research Analyst at Savills provides the following useful summary:
"...blockchain is a super-secure way of recording transactions and contracts and transferring data, but - and it’s a crucial but; one that makes blockchain such a game-changer- the information it holds is not held in one place.”
Essentially, blockchain is a digital ledger stored on multiple different computer systems (referred to as “nodes”); each of which has a full copy of the ledger and every transaction proposed to be added to it. New “blocks” of transactions can be added to the ledger but only by consensus among the nodes – and old transactions cannot be overwritten.
For those reasons, the design of the blockchain is said to be virtually incorruptible, making it suitable to record not only financial transactions but almost anything of value.
How might blockchain revolutionise the property industry?
The potential economic and social impact of blockchain technology has been compared with the effect of the inception of the public internet in the early 1990s, so perhaps the references to a revolution are not hyperbole after all.
A “blockchain land register"
The UK government has recently announced plans to move HM Land Registry to digitised technology, such as blockchain, by 2022 under the project name “Digital Street”. In March 2019 Digital Street ran a residential conveyance through its demonstration blockchain platform and completed the transaction in 10 minutes – rather more quickly than the 22 weeks that the transaction had taken when conducted in the traditional way. Whilst this might sound ambitious, it was only a demonstration with information from a transaction that had already taken place. Other governments are ahead of the game in terms of real-world application.
In February 2017, the government of Georgia announced that it would work with tech developer Bitfury to commence the registration of all property transactions onto blockchain. It is reported that the government was attracted by blockchain’s transparent and incorruptible nature. At the Legal Tech of Future Law conference last year, Marc Taverner of Bitfury stated, with reference to the Georgian land register, that: "The blockchain is like a book. The pages are numbered; the land register entries are immutable. The book is published and all people can see it. Since it is stored in many places at the same time and no single place can control all nodes, one will not be able to convince the world of a fake version of the truth." By December 2017, over 300,000 land titles in Georgia were on blockchain.
Since Georgia led the way, Dubai and Ukraine have reportedly trialled the technology and the Swedish government has followed suit by completing a successful pilot to bring the Swedish land register onto blockchain. However, unlike the Georgian government, the Swedish government is not motivated by concerns around corruption; instead, its aim is to stay relevant and trustworthy in the eyes of its citizens. Mats Snäll, Chief Digital Officer of the Swedish Cadastre Office has stated that:
"In the 1970s, Sweden brought the land register from paper into the computer. So suddenly we did not trust the paper anymore. The Swedes have great faith in their state. But times changes and people do. The younger generations have grown up with cyber security, transparency and digitization. As a state, we must ensure that citizens still trust us tomorrow. Because otherwise they will trust companies like Google and use a future land register app that they are surely working on already.”
For the UK government, its ultimate aim is to become ‘‘the world’s leading land registry for speed, simplicity and an open approach to data" and “Blockchain is one of the underlying technologies that will be trialled."
Some types of blockchain technology can power so-called “smart contracts”, where something can be programmed to happen on the blockchain as soon as the relevant conditions are met. The production of smart contracts could be fully automated; from initial electronic creation through to digital signing. According to Nick Clare, Head of Project Management at JLL UK, the instructions for these contracts will be “rooted in the transaction so that payment can only be taken so long as the instructions are fulfilled, providing complete transparency to all parties and reducing the likelihood of payment disputes.”
It is suggested that rental payments (and possibly also rental deposits) could be taken and tracked on blockchain, thereby simplifying current auditing processes. Service charges could also be calculated, invoiced and paid through blockchain, again simplifying processes and presumably minimising the risk of errors arising. Within the property sphere, it may well be managing agents who feel the impact of blockchain the most in coming years.
A secondary market
With regard to how blockchain may give rise to secondary markets, Jamie Burke, chief executive at Outlier Ventures & Convergence VC, commented in April 2017:
"...What you can do is fractionalise the asset. I can let lots of individuals take a stake in my property. You can in effect IPO a property or a group of property [sic]. You could transact a pound share, for example, and people could buy and sell that pound share.”
San Diego-based real estate investment and merchant bank, Silver Portal Capital LLC, has already pounced on this potential opportunity by partnering with New York electronic trading and technology provider, Fundamental Interactions Inc., to create Silver Portal Markets; a blockchain-enabled primary issuance and secondary trading platform for illiquid real estate securities and properties.
We are now seeing several such trading platforms starting to emerge in the UK, and if any of them takes off it could potentially transform the UK property market, increasing competition and encouraging innovation.
When will the UK property industry see real change?
The “blockchain revolution” is expected by those ‘in the know’ to happen in the next five years.
The UK government’s commitment to trial blockchain technology and to digitise the country’s land registry by 2022 support this five-year timeframe, as do the developments in other countries and the fractionalisation platforms noted above.
So, whilst a "revolution” isn’t upon us just yet, we are undoubtedly on the cusp of change; the scale and extent of the change remains to be seen.