JUMPING ON BOARD THE BLOCKCHAIN REVOLUTION

March 2018

-Lynn Schwartz

 

“If you don’t like something change it.  If you can’t change it, change your attitude.”  Maya Angelou

 

Many of us resist change, fearful of disrupting the status quo.  While attorneys may not enthusiastically embrace the rapidly developing technology known as blockchain, they need to understand that blockchain is certain to impact nearly every market and industry, including, and especially, real estate.  In order to remain relevant to their clients, attorneys will need to overcome their trepidation.  Since real property transactions are centrally and publicly recorded and so vulnerable to fraud, blockchain pioneers are targeting title registry systems to showcase the many benefits of this decentralized and more secure technology. From homeowners to lenders, there are many gains to be had by revolutionizing the way real property, and money, changes hands.

Blockchain is defined as “a data structure that allows for a digital ledger of transactions to be shared [think ‘open source’] among a distributed network of computers.  It uses cryptography [think ‘secret code’] to allow each participant on the network to manipulate the ledger in a secure way without the need for a central authority [think ‘deregulation’] such as a bank or trade association.”[1] (emphasis added).  So what, in layperson’s terms, is blockchain?

Much like a checkbook is a ledger of one’s personal financial transactions, with each entry indicating the details of a particular transaction …, the blockchain is a complete listing of all transactions whether financial or otherwise.  However, unlike a checkbook, the blockchain is distributed among thousands of computers or ‘nodes’ with a process for validating transactions that utilizes a group-consensus protocol.  Making an addition to a blockchain ledger requires the approval of the network at large making retrospective changes essentially impossible.[2]

Blockchain creates a unique “hash” for every transaction that is stored in the database by each individual member of a given chain.  It increases access, security, and efficiency, and eliminates costs and the potential for fraud, but its most disruptive element is its ability to eliminate third-party intermediaries in certain transactions.[3]

Much of what attorneys do for their clients, for instance, could become redundant. Blockchain could eliminate the need for attorney-transactional agreements through the use of “smart contracts,” contracts a computer can understand and execute using “if this, then that” rules.[4]  The smart contract is a “digital representation of the mutual agreements contained in a traditional real estate contract as lines of software code that self-executes and self-enforces.  It has the power to move funds between bank accounts, transfer property titles via tokens and reconcile payments.”[5]

Lawyers are not the only ones at risk for job loss.  Just as Airbnb disrupted the hospitality market and Uber has impacted the taxi industry, the entire real estate market must be ready to adapt because the jobs available today may not be ten years from now.[6] CEO of Digital Asset Holdings, Blythe Master, estimates that 30-60% of jobs could be rendered redundant by blockchain.[7]  On the other hand, according to one study, the Internet (once feared as a major disrupter) was responsible for significant GDP growth amongst developed countries.[8]  Just as blacksmiths became obsolete with the invention of the automobile, a whole new job market opened up for mechanics.  The  legal profession must consider how to fit into new opportunities arising from the changing technology.[9] This starts with becoming active and willing participants in early stages of development, and lending expertise to the process.

“[B]lockchain presents an incredible (unique, even) opportunity for lawyers to position themselves as trusted strategic advisors to clients…”[10]  This is true both during R&D, and thereafter.   While IT professionals’ expertise lies in the application of computers and data to all facets of real property transactions, only a lawyer can connect this technological application to potential legal and regulatory implications for clients, and therefore, they will need to work with software developers and software coders/programmers.[11]  There will be a need for a “cost-effective, transparent and (nearly) frictionless real estate transaction platform” whether for residential or commercial transactions – the diligence process could be a “dynamic smart transaction” allowing all parties to access critical information.[12]  This opportunistic viewpoint can be equally applied to county clerks or other municipal agents responsible for real property record keeping.  The clerks, especially, could become critical players.  They could act as “custodians in the transfer, getting a piece of the token representing the blockchain title.”[13]

Looking ahead, an ability  to properly analyze the information stored in the blockchain will remain, as will the need to liase with title insurance underwriting counsel to determine whether title is insurable, or determine more importantly, whether title is marketable.  The more complex the real estate transaction, the more crucial this knowledge base becomes.  It is hard to imagine a computer code that knows the nuances of title exceptions, which may be removed, or how to get around them.

Some remain skeptical of the feasibility of blockchain, believing among other negatives, that it may actually increase transaction costs, and that its immutability once a transaction has been recorded could lead to regulatory violations.  Additionally, some believe blockchain’s disruption to the current market of players in any given transaction is without upside.  For any “disruption to be a positive business force, it must drive new competitive advantage, not simple chaos.”[14]

But pilot programs have already launched, such as the one in South Burlington, Vermont where start-up Propy Inc. is collaborating with the city to use blockchain technology to record and track property records.  One financial technology attorney says the goal is not to eliminate clerks’ jobs but rather free them up to concentrate on other roles.[15]   Propy is looking to collaborate with other states that are “blockchain friendly” such as Nevada, Arizona, Delaware and Illinois.[16]  Meanwhile, in Spring of 2017, Cook County, Illinois completed a successful eight month pilot program, a collaboration between a real estate tech start up, blockchain consultants, lawyers, title insurance professionals and others.[17]

Other pilots are already at work seeking to overcome the hurdles which have been exposed in the technology.[18]  Major consortiums are now attracting global members as well as funding, and industry leaders such as IBM, Microsoft, and Accenture, “have made significant commitments to (blockchain technology) …”[19]  IBREA, the International Blockchain Real Estate Association, is a membership of professionals in real estate development, investment, escrow, title, law, brokerage, government, marketing and IT.  Its initiatives include setting industry standards by developing a Best Practices guide, identifying new standards to operate with a blockchain paradigm and identifying organizations such as title insurance companies which are involved with such standards and can lead in the collaborative process.[20]

In sum, just as corporate behemoths are investing in the R&D behind blockchain and joining think-tanks and consortiums in an effort to be part of blockchain’s future, attorney should capitalize on opportunities to get involved on the local level and beyond.  While change is never easy, it is imperative that we educate and arm ourselves for a technological revolution that appears inevitable as well as certain to disrupt the way we practice real estate law.

 

[1] S.H. Spencer Compton and Diane Schottenstein, Blockchain Technology and Its Application to the Practice of Real Estate Law, by, NYSBA N.Y. Real Property Law Journal, Spring/Summer 2017 Vol. 45 No.2., p. 14.

[2] James Condos, Blockchain Technology: Opportunities and Risks, Technology Report (January 15, 2016),  http://legislature.vermont.gov/aspets/legislative-Reports/blockchain_technology_report-find.pdf.

[3] Id.

[4] Blockchain Could Jolt Real Estate and The Title Industry in 2017, supra.

[5] Blockchain Technology and Its Application to the Practice of Real Estate Law, supra, at p.16, citing Midasium Contracts, http://midasium.com/smart-contracts and John Reeam, Yang Chu, and David Schatsk, Upgrading Blockchain: Smart Contract Uses in Industry (June 08, 2016), https://dupress.deloitte.com/dup-us-en/focus/signals-for-strategists/using-blockchain-for-smart-contracts .

[6] Brian Davis, 5 Ways The Real Estate Industry Will Completely Transform Over The Next Decade, https://www.biggerpockets.com/renewsblog/real-estate-industry-changing/.

[7] Michael del Castillo, Threat or Opportunity? Blythe Masters Talks Blockchain Jobs Impact, March 21, 2017, https://www.coindesk.com/threat-opportunity-blythe-masters-addresses-blockchain-jobs-impact/.

 

[8] See generally, Scott Dennis, Will Blockchain be a Net Loss For Jobs?, March 4, 2017, http://www.bluecollarthinktank.com/2017/03/04/will-blockchain-be-a-net-loss-for-jobs/.

[9] Id.

[10] Caitlin Moon, Blockchain for Lawyers 101: Part 2, January 31, 2017, http://www.lawtechnologytoday.org/2017/01/blockchain-lawyers-101-part2.

[11] Id.

[12] Id.

[13] Blockchain Could Jolt Real Estate and The Title Industry in 2017, supra.

[14] Jason Bloomberg, Eight Reasons to Be Skeptical About Blockchain, May 31, 2017, https://www.forbes.com/sits/jasonbloomberg/2017/05/31/eight-reasons-to-be-skeptical-about-blockchain/#7c980ec35eb1.

[15] David Brooks, Vt. City’s officials isn’t just talking about blockchain, they’re experimenting with it, February 5, 2018, http://www.concordmonitor.com/blockchain-burlington-vermont-15284337

[16] Id.

[17] Ragnar Lifthrasir, June 28, 2017, Permissionless Real Estate Title Transfers on the Bitcoin Blockchain in the USA! – Cook County Blockchain Pilot Program Report, https://medium.com/@RagnarLifthrasir/permissionless-real-estate-title-transfers-on-the-bitcoin-blockchain-in-the-usa-5d9c39139292

 

[18] See generally, Blockchain Could Jolt Real Estate and The Title Industry in 2017, supra.

[19] Craig A. deRidder, Peter Freeman and Nik Holtan, Blockchains, Smart Contracts and Real Estate, June 15, 2017, https://www.gravel2gavel.com/2017/06/blockchain-smart-contract-real-estate.html.

[20] See www.ibtcrea.org/initiatives.  IBREA was also one of the participants in the Cook County pilot program.  See Permissionless Real Estate Title Transfers on the Bitcoin Blockchain in the USA! – Cook County Blockchain Pilot Program Report, supra.

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