Blockchain Technology and its Role in Real Estate Transactions

CONTENTS By Nyawira Kirubi and Jeff Kinuthia[i]

Introduction

The growth and popularity of blockchain technology is at an all-time global high and does not appear to be slowing down anytime soon. Courtesy of the versatility of its use and application, blockchain technology may have a newfound utility in the future management and registration of land transactions in Kenya, according to Information Communications and Technology (ICT) Cabinet Secretary, Joe Mucheru.

So, what is blockchain technology?

A 'blockchain' is a digital database or ledger distributed across a network of computers, protected by coding within the data that prevents editing and removal., Blockchain technology is the underlying application that enables all of this. Importantly, a blockchain records and stores all transactions that take place within the network, essentially eliminating the need for third parties to confirm the validity of the transactions.

Until recently, blockchain technology was largely utilised and associated with cryptocurrencies such as Bitcoin but more and more jurisdictions are slowly opening up to its use in different areas, such as financial asset management and in land registration systems.

Blockchain Technology and Real Estate

Property fraud is one of the biggest problems facing developing countries and Kenya is no exception with many Kenyans having fallen victim to fraudulent land dealers. For years, aggrieved citizens voiced their concerns with the government regarding the poor management of the lands registries and in 2016 the Ministry of Lands finally embarked on a digitization exercise of the 57 land registries kept across the country, which have been keeping manual records since 1895. This exercise is ongoing and is aimed at improving the delivery of services through electronic land transactions.

While this effort must be lauded, it came at a period when the developed world appeared to be going one way and Kenya the other. However, the recent announcement by the ICT Cabinet Secretary that blockchain technology will be applied to supplement the digital database is a welcome relief.

Blockchain Versus Traditional Databases

Blockchain technology has numerous advantages over traditional databases (such as the one being implemented by the Lands Ministry). Firstly, under blockchain, a central database or settlement system maintained by the Land Registry, for example, is replaced by multiple copies. This is beneficial as one of the problems with a centralized system, especially in a country with endemic corruption, is that ill-intentioned bureaucrats often infiltrate and tamper with the system, and digital databases is not exempted from such tampering.

In a land transaction utilising blockchain technology, multiple copies of a blockchain will be held by any number of interested parties, such as owners, potential purchasers and agents. These copies continuously and automatically update their contents via a complex consensus mechanism with the result that they are always identical. By using hashes to identify every real estate transaction, proponents argue issues such as who is the legal owner of a property can be remedied.

Secondly, blockchain technology underpins ‘smart contracts’, which are programmable contracts that self-execute when certain conditions are met and offer the possibility that transactions could complete much faster when combined with a blockchain registry. For instance, title to the property could be transferred to the purchaser automatically on receipt of funds and registration delays would be eliminated leading to greater efficiencies and cost savings.

Third, nothing on the blockchain can be changed save with the consensus of the network. Any confirmed transactions on the blockchain cannot be changed, negating fraud.

Lastly, what happens on the blockchain stays on the blockchain. A public blockchain will act as a public ledger meaning that as long as the blockchain remains operative, the data on it will remain accessible.

International Application of Blockchain

Globally, other countries are already in various stages of exploring blockchain-based land registries:

In Brazil, as a test case,the government partnered with a blockchain start up to overhaul the land registry at two Brazilian municipalities.

Sweden has a well-established land registry system and believes blockchain could save the Swedish taxpayer over USD 100 million by speeding up transactions, reducing paperwork and minimizing fraud.

Republic of Georgia has already agreed to use blockchain to validate all government related property transactions. Since its launch in February 2017, Georgia’s blockchain provider has helped implement property registration and has registered more than 100,000 documents.

Closer to home, Rwanda recently announced that a Swiss cybersecurity company, in partnership with Microsoft, will soon offer support to the Rwandan Government in adopting blockchain technology in the country’s land registries.

Challenges Facing the Implementation of Blockchain

Similar to any novel technology, blockchain and its application does comes with its challenges. Some of the challenges likely to be faced are:

Regulation and Governance

Regulations have always struggled to keep up with advances in technology and blockchain technology is no exception. One of blockchain technology’s challenges is that it reduces oversight. There is thus a strong argument that blockchain applications should work within existing regulatory structures not outside of them.

The recently enacted Computer Misuse and Cybercrimes Act (the “Act”) is however a commendable step in the right direction. First and foremost, it acknowledges and defines blockchain as a digitized, decentralized, public ledger of all currency transactions. Additionally, the Act goes on to set up a National Computer and Cyber Crimes Committee which is tasked with, among other things, advising the government on matters relating to blockchain technology, critical infrastructure, mobile money and trust accounts. However, further regulations on the governance and structure of blockchains will still need to be implemented.

Data Security and Privacy

Many potential applications of blockchain, such as in land transactions, require smart transactions and contracts to be indisputably linked to known identities and thus raise important questions about privacy and the security of the data stored and accessed on the shared ledger. Key concerns that will have to be dealt with is, who has access to the ledger, and how access is controlled?

Even with the very recent passing of the Act the contentious issue of data security and protection has not been adequately addressed. Nevertheless, the Act states that one of the duties of the National Computer and Cyber Crimes Committee (established under the Act) is to ensure that the right to privacy guaranteed under the Constitution is protected.

Cost

The cost of implementing blockchain technology is high. This is due firstly to the fact that we are yet to properly digitize the land registry. Once the digitization is complete, the second step will then be to set up infrastructure for the blockchain techonolgy, which will involve acquiring the right software and hardware to support the technology.

The Future of Blockchain Technology in Kenya

The announcement by the ICT Cabinet Secretary on blockchain and land registries, and the setting up of a digital ledger and artificial intelligence taskforce by the ICT Ministry, is an encouraging sign that the government is open and willing to adopt blockchain technology.

In the private sector, numerous startups have already begun implementing blockchain in their businesses. Land Layby’, a real estate firm, announced that the firm is set to roll out an application for a blockchain-powered land registry sometime in 2018. The initial role of the platform will be to provide a mirror reflection of the Government Land Registry systems. In the cryptocurrency sector, numerous companies relying on blockchain technology, such as ‘L-Pesa’ and ‘Belrifics Global’, have gone a step further by launching Initial Coin Offerings.

Summary

Blockchain technology is a revolutionary tool that will change the way we do business in a number of sectors, from the land registry to the financial sector, in essence any industry that has great data

[i] Nyawira Kirubi is a Partner and Head of the Real Estate and Banking and Finance practice groups at MMAN Advocates, a leading corporate law firm based in Nairobi, Kenya. She can be contacted via email at [email protected]. Jeff Kinuthia is a Lawyer at MMAN Advocates. He can be reached via email at [email protected].