Real Estate on the Blockchain Could Save Money, Crush Fraud

It's 2017 and people still dispute who owns what property in major metropolitan areas.

Residential properties are seen from the top of the outcrop Eston Nab overlooking Middlesbrough, northern England on March 8, 2017. / AFP PHOTO / OLI SCARFF (Photo credit should read OLI SCARFF/AFP/Getty Images)
Ready for upload. OLI SCARFF/AFP/Getty Images

The United States handles property in a weird way.

Proving property ownership is a private matter here. So when the owners of real estate die without leaving behind any sort of plan for new ownership, it creates an opportunity for fraud. For example, a Brooklyn couple died in the ’90s with no heirs and no will. Their house crumbled and eventually a community garden rose up in its place. Then Brooklyn property turned red hot, developers showed up claiming to have secured legal title. Had they? Who knows. No one on the other side of the deal is alive to testify to the authenticity of their documents.

See the problem?

In Sweden, all deeds are registered with the government. This is true in most other developed countries around the world, but there are still deadweight costs on their property system—in particular, time wasted sending a closing’s many paper documents through the mail. So Lantmäteriet, the Swedish property authority, has been collaborating with the technology company ChromaWay and others to put contracts for sale and property mortgages in a digital form, authenticated by the blockchain. ChromaWay has set up a test environment for a proposed system, and partners in other parts of the real estate industry have been testing it out and looking for gaps.

Chromaway prototype workflow. Courtesy image

“You can see the ownership by the outcome of the contract,” Henrik Hjelte, the company’s CEO told the Observer in a phone call. In other words, better to digitize the documents that enable a deed rather than the deed itself. This has additional advantages for property owners and those with claims on a parcel, such as banks. Digitally signed contracts are all but impossible to modify fraudulently. If a single bit in a digitally signed document gets changed, it won’t authenticate against a digital signature. 

Imagine, for example, a dispute over a contract that ended up in court. Each party ends up presenting the court with a copy of their legally signed contracts, but they are different in a small but important way. The court has to rely on each party’s attestations and accompanying documentation to decide which version is right. A digitally signed contract can only be forged if the con man can get a hold of the other party’s private key.

Mediachain takes a similar approach to authenticating the originators of creative work, as we’ve previously reported.

It would also speed up transactions by permitting each party to know the others’ decisions as soon as they are finalized, rather than waiting for documents to get delivered. As someone who has bought and sold a home using the old system, I can attest that it feels like a very complex and slow moving game of telephone, except one in which certain parties (such as banks) can let dead silence linger a long time.

Swedish law now requires a signature to close a sale, and the parties don’t know if a purely digital signature could count as the signature yet, but this is an issue that can be easily worked around until the law catches up to technology. On the flip side, digitally signed documents have advantages even in apocalyptic situations. Imagine all the publicly owned digital records were destroyed, including the land authority’s blockchain. Presumably, some of the parties involved in each transaction would have copies of their own digitally signed documents. Even without the blockchain, each party could authenticate the documents with their own keys, protecting both against criminals attempting to take advantage of a society in disarray.

“We are looking to implement this in other countries that are closer to the US,” Hjelte said, looking at disrupting applications more pedestrian than apocalyptic preparedness, such as the expense of land title insurance. Americans spend more than $800 million each year buying insurance against the possibility that the person selling a property didn’t actually own it, as we’ve previously reported.

In the developing world, better property records systems make it more feasible for people to borrow against real estate and start new businesses.

Hjelte also confirmed that ChromaWay will open source its software once its ready. Only an open source system is flexible enough to grow all over the world and create a widely interoperable property system.

In a world with digitally signed, blockchain logged property contracts, no one would be able to suddenly appear in a newly hot property market and claim to own the properties of the dead or merely disorganized, because their fake digital documents wouldn’t have an entry from the right time period on the blockchain. There’s some chance that the City of New York might pay more than a million dollars to developers for a piece of land that they might have never actually bought, because it has no reliable way to prove that they didn’t.

In other words, in one of the world’s most valuable property markets, we’re still a bit fuzzy on who owns what. This feels like a problem that should have been solved by now.

We can have live video chats on three different continents and robots can drive trucks on the highway, but our paper-based property record system is vulnerable to clunky hacks. It seems like it’s not quite 2017 everywhere yet, but hopefully it soon will be.

Real Estate on the Blockchain Could Save Money, Crush Fraud