Blockchain technology has the potential to transform, streamline and modernise the real estate sector. However, there are practical, legal and regulatory barriers that organisations should address. An analysis by CMS.
Blockchain is one of the buzzwords of the new year. There has been a cryptocurrency gold rush and many commercial organisations and even countries wish to position themselves as the market leaders in the use and deployment of this technology.
Blockchain’s potential is vast and broad, ranging across multiple sectors and industries, with real estate being no exception. The potential benefits of this technology (including reduced transaction processing times and costs) are clear. However, there are also certain practical, legal, and regulatory barriers that organisations should be aware of when seeking to undertake real estate transactions on a Blockchain.
What is Blockchain?
A Blockchain is a digital database (or ledger) distributed across a network of computers containing an increasing number of data records that are protected by powerful cryptography. It is therefore designed to be protected against human error, editing, tampering, removal and revision. There can be any number of Blockchains used and deployed by an infinite number of organisations for different purposes, so there is no definitive ‘Blockchain’.
Blockchains can be ‘public’, allowing anyone to contribute data, with all participants possessing an identical copy of the ledger. The Bitcoin Blockchain is the most obvious ‘public’ example – being recognised as legal tender in some countries around the world (albeit its status as legal tender in the UAE and the UK has not been confirmed).
‘Private‘ Blockchains allow only specified people or organisations (e.g. Dubai Land Department (“DLD”), financial institutions etc.) to submit transactions and/or validate them across the network.
Revolutionising and Challenging the Real Estate Market
The possibilities for Blockchain and cryptocurrencies in the real estate market are exciting and endless.
Commercial real estate personnel are realising that Blockchain-based smart contracts can play a significant role in the industry by transferring title to purchasers or concluding lease contracts. Smart contracts record and execute transactions on a Blockchain as coded instructions that self-perform when chosen criteria are met. It therefore acts as a digital ledger that can increase efficiency and reduce errors, recording a detailed level of property data.
Rental payments recorded on a digital ledger could ultimately assist property managers with streamlining reporting and property valuations. It will further enhance the speed and quality of data shared in the due diligence process of transactions.
However, as with any new technology in an unregulated landscape, Blockchain raises some interesting and unique legal issues.
Firstly, any smart contract to be entered into must have all the elements of the required ‘traditional contract’ it is seeking to replace. Coders must therefore be able to recreate certain key real estate legal concepts and contractual provisions (such as conditionality and termination) into a set of coded instructions that self-perform. There are also issues regarding how preambles and imprecise legal concepts, such as “in good faith” or “reasonable endeavours”, can be replicated in computer language. These will need to be overcome to ensure any smart contract becomes a workable and legally effective solution.
There are further concerns around how parties will decide which laws apply and which court or tribunal should be used to resolve disputes. Contractual parties in a Blockchain system will often be located in different countries across the world. How the governing law of a smart contract will be decided (location of the parties themselves, location of the real estate, or perhaps location of the relevant computer servers) and how possible conflicts of law between one country and another can be resolved, will be key to determining issues around liability and settlement of disputes.
A final consideration is how flexible the use of a particular Blockchain for contracting purposes will be and whether it can be adapted to cope with certain changes in law. Records on a Blockchain are intended to be fixed and not changeable. Therefore, if a Blockchain holds data in a way that complies with the current real estate laws in a particular jurisdiction and the law then changes, can a Blockchain be changed to comply with the new law?
As well as using Blockchain for real estate transactions, investors and developers are increasingly looking at using cryptocurrencies for sales and purchases, which we shall analyse in our Dubai real estate example below.
Developments in the Dubai Real Estate Market
As reported in October 2017, DLD’s vision is to create a Blockchain database for all Dubai properties, which will be available to its customers, government and private sector partners. It is being developed in co-operation with Smart Dubai under the slogan ‘Simple, Secure, Fast’ and aims to streamline the registration process.
It is intended that DLD’s Blockchain will record all real estate contracts, including lease registrations, and link them with DEWA, the telecommunications system, and various property-related bills. The platform will incorporate a tenant database, holding information such as Emirates Identity Card data and validity of residency visas. It also has the potential to create transactional dependence; for example, completion of a sale and purchase transaction could be dependent on loan approvals or seller/buyer clearances.
The Blockchain technology will be hugely beneficial to tenants, as it will allow them to make electronic payments at any time and from anywhere in the world, eliminating the need to visit numerous government entities. The technology will allow global investors to verify property data that is backed by timestamp signatures, enhancing the accuracy of data, the credibility of investment transactions, and the transparency and clarity of the market.
In addition, some developers are seeing the potential benefits with Bitcoin, such as Aston Plaza & Residences in Dubai Science Park, where 150 homes were made available to purchase using Bitcoin – the first property offering of its kind.
As Bitcoin transactions take just a couple of minutes to process, and are globally available with minimal / zero fees, the savings and benefits are substantial for property transactions. The risk of dealing with Bitcoin payments for developers is minimal, as payments can be converted immediately to US dollars using a conversion service once the deal has closed.
Given Bitcoin’s extreme volatility, it can be tricky to get buyers and sellers on the same page about pricing Bitcoin-only transactions, as the value is locked in at the time of payment. However, a seller could hedge against potential Bitcoin devaluation by adding a Bitcoin premium to the selling price.
Coupled with its financial volatility, the unregulated nature of cryptocurrencies means that some are skeptical about its use as a financial medium for real estate transactions and typically Bitcoin is being converted to cash before the purchase is made. Although, for an investor, a major advantage is that transacting using Bitcoin persifies their crypto-assets into tangible real estate without converting it to flat currency.
For those that have their reservations, Bitcoin could be more widely used for monthly rentals as a payment method, which could iron out any fluctuations in its value.
As the Bitcoin market and technology develops, and legalities are tightened, we expect to see many more transactions of this nature in Dubai.
The Future’s Bright
Real estate and construction is a key driver for the UAE’s economy, being the largest contributor to the UAE’s GDP after oil. With a vision towards Expo 2020 and beyond, we expect that the country’s leaders will want to lead in this latest technological field.
We anticipate seeing many partners joining the real estate Blockchain environment to enhance real estate client services, including banking, mortgages, and utilities and maintenance operations. The endless possibilities for the partnering of the real estate and technology markets should attract further international investment in the UAE and will continue to showcase the UAE as an innovative and forward thinking power house.
Disclaimer: Information in this article should not be relied on as legal advice.