What do Cook County, Sweden, and Kenya have in common? They are all home to innovate property title experiments being conducted with the help of blockchain technology. While title registration is an essential part of property both legally and economically, it is too often fraught with problems—and in some places, it is nonexistent. Like in so many other ways, however, the blockchain promises to change that.
As many reading this are familiar, various forms of property involve title registration. For instance, ownership of a parcel land is represented by a title document (e.g., a deed). That document, in turn, is recorded with governmental title registry, such as a county clerk’s office or register of deeds. The purpose of title registration is to provide public notice of an evidentiary basis for ownership. But title registration is often clumsy, unsophisticated, out-of-date, susceptible to abuse, and prone to human error.
Against this backdrop, enter the blockchain. The blockchain (more accurately, a blockchain) is, at its core, a database. But instead of collecting information in a central location as a controlled ledger, a blockchain makes use of individual computers around the world to compile information on a distributed, peer-to-peer network. Individual “blocks” of information enter the distributed network, upon which they are verified and become part of a permanent “chain.” The resulting ledger, secured by cryptography, becomes immutable and practically unhackable. Best known as the technology underlying cryptocurrencies like bitcoin, the blockchain holds promise in any application that places a value on maintaining accurate records.
In the United States, multiple locales have begun experimenting with blockchain-based title registration. Cook County in Illinois, for example, recently completed a pilot program, concluding that the blockchain “can make transacting real estate simpler, safer, more accurate and easier to understand[.]” And while “there are challenges facing its adoption[,] [i]n many cases, these challenges are the very reasons why such a new structure should be adopted, and thus can also be looked at as opportunities.” Similarly, the small city of South Burlington, Vermont, partnered with startup Propy to test a blockchain title registry. Both Cook County and South Burlington are looking to the blockchain to save costs by eliminating paper, reducing the amount of human verifications needed, and speeding up transactions. If blockchain-based title registration becomes widespread, all players in the real estate industry could be impacted—buyers, sellers, agents, lenders, attorneys, insurers, and governments.
Abroad, many foreign governments are even further along. Building on an already digitized title registry, Sweden continues to move closer to a nationwide blockchain-powered database. Just this month, the Republic of Georgia signed a memorandum of understanding with a heavily-funded company called Bitfury to build a system for all aspects of representation and recordation, including new titles, demolition of property, mortgages and rentals, and notary services. Governments in Brazil, India, Russia, the Ukraine, and elsewhere have likewise initiated programs to test blockchain title registration.
It is in developing countries where the blockchain has the potential to cause the most dramatic changes. Many developing countries lack the processes and institutions necessary for title registration. The majority of people in the world—70%, according to the World Bank—who have land own it with tenuous title. The absence of title registration creates distinct disadvantages, which generally fall into two broad categories.
First, title registration fosters a prosperous economy by enabling the production of capital. In his book The Mystery of Capital, Peruvian economist Hernando de Soto demonstrates the importance of title registration. Ownership representation, says de Soto, creates a “visible sign of a vast hidden process that connects all these assets to the rest of the economy.” With adequate documentation, assets can be used as collateral, can create a link to an owner’s credit history, provide a reliable address for the collection of debts, and serve as a foundation for the creation of securities and secondary markets. Without representation, in contrast, real estate “cannot be traded outside of narrow circles where people know and trust each other, cannot be used as collateral for a loan and cannot be used as a share against an investment.” Even though individuals in the developing world save and accumulate significant assets, those assets are not represented in a form adequate to be leveraged to produce capital. They are, in de Soto’s words, “dead.”
Second, the absence of title registration undermines the security of property rights. Dictatorial governments have preyed on tenuous title to real estate. Without a suitable public record of who owns what, governments can simply say that it—or its friends—owns whatever it wants. Honduras, Venezuela, Peru, and Zimbabwe, for example, have experienced this phenomenon on a large scale. And even the looming threat of expropriation makes it more difficult to leverage property as, say, collateral for loan.
Title registration alone may not be enough to address these issues. For various reasons, corruption runs deeper in the developing world, making governmental recording offices susceptible to mischief and abuse. A common problem is “double ownership,” where cartels collude with public officials to illegally procure title to someone else’s land. Thus the problem lies not only in the absence of title registration altogether, but also in its inadequate quality.
With high-quality title registration, owners have comparatively more secure rights in their property. Secure rights, in turn, incentivize more long-term investment, unleash the entrepreneurial spirit, and allow owners to leverage their property to produce and accumulate capital. Creating adequate title registration systems, then, is indispensable for incentivizing investment and enabling economic mobility in the developing world.
For many countries, the blockchain could be used to implement higher quality title registration. Doing so would make verified ownership records easily available to neighbors, investors, lending institutions, and creditors. Equally important, because of the blockchain’s security and immutability, governments would be restrained from tampering with real estate records. And even where governments refuse to use blockchain-based registries, such registries could still exist alongside. Indeed, in Kenya, where title registration is notoriously bad, a real estate firm has created a private blockchain, awarding bitcoin-like tokens to users who correctly document land records on the blockchain.
By addressing the twin problems caused by inadequate representation and recordation, a blockchain-based title registry could help secure and publicize property rights, incentivize long-term investment, and thereby give new life to “dead” capital. Locations where high-quality title registration becomes a reality will become more attractive markets for foreign capital investment. Anyone who invests or does business oversees—and anyone considering doing so—should watch the shift in title registration technology carefully.
*Joseph S. Diedrich is an Associate at Husch Blackwell LLP, focusing his practice on commercial and constitutional litigation and appeals. He can be reached at email@example.com.