The real estate industry is frequently identified as one of the most likely early adopters of blockchain technology and smart contracts. However, industry participants remain skeptical as to the timing and magnitude of the expected changes. That is understandable given the close association of blockchain technology with bitcoin controversies, other virtual currencies and some questionable crowdfunding ventures. Moreover, it is an emerging technology that includes confusing public, private and hybrid versions and involves imprecise terminology and standards. And smart contracts, which pre-date bitcoin, are still misunderstood and mistrusted.
What is not widely understood is that the potential applications of blockchain technology and automated smart contracts are extremely broad and will often not involve any virtual currency. Distributed blockchain databases with identical records that update simultaneously on multiple servers in multiple locations will provide a foundation for business transactions and public records that is more efficient, secure and transparent. Smart contracts will fulfill the role of trusted intermediaries, especially for routine tasks.
The irony becoming apparent in 2017 is that the mysterious inventor of bitcoin, who profoundly mistrusted governments after the financial crisis and eliminated their role as financial intermediaries, has created a technology platform with unique security features that is increasingly attractive to government agencies throughout the world. Cities such as Chicago, Dubai, Rotterdam and Toronto, states such as Arizona, Delaware, Hawaii and Illinois, and countries such as Australia, Estonia, Georgia, Ukraine, Singapore and Sweden are taking active steps to support and develop blockchain databases and smart contract applications. Enhancing public trust and creating a better climate for efficient business activity are the key drivers.
Of particular relevance to the real estate industry are laws allowing for corporate entities to be formed and operated on blockchain platforms, initiatives to make blockchain records admissible in court, laws recognizing the enforceability of smart contracts and smart UCC filings and the pilots in the United States and elsewhere developing trustworthy digital land and title records or offering more efficient and cost-effective land use, leasing, conveyancing, mortgaging and financing alternatives resistant to fraud.
Transactions on the internet today rely heavily on intermediaries to reduce counter-party risk, including title companies, public agencies, escrow agents, trustees, banks, attorneys and others. These intermediaries increase cost and slow down the processing and closing of the real estate transactions. Blockchain technology and smart contracts can eliminate or reduce the role of intermediaries and facilitate peer-to-peer transactions. For instance, Airbnb and HomeAway have been major disruptors of the hospitality industry in a short period of time, but Airbnb and HomeAway are, like the companies they aim to replace, also intermediaries that rely on labor intensive central databases. Over time, their businesses will change as self-executing smart contracts allow for vacation rental agreements directly between the homeowner and renter, with secure blockchain databases recording all of the relevant data and information.
Leading technology providers and advisors, including IBM, Microsoft, Accenture and Deloitte, have made significant commitments to these technologies and the pace of experimentation and adoption has picked up considerably this year. Cloud-based services have reduced the cost and risk of blockchain and smart contract pilots. Major consortiums, such as the Hyperledger Project, R3 and the Enterprise Ethereum Alliance, have attracted many new global members and substantial funding in the past few months. The Blockchain Research Institute announced an alignment last week with the Canadian government and several provincial and municipal administrations to give Canada “a globally competitive advantage in the development of this transformative technology,” according to the Minister of Innovation, Science and Economic Development.
Today, few of us give much thought to the centralized databases, each controlled by intermediaries and each vulnerable to tampering, that we depend on, except when they let us down or we are locked out or hacked. Blockchain databases will be the foundation upon which smart contract and other applications, including artificial intelligence, are based, and little thought will be given by users in the future as to how they are layered and configured. However, the benefits associated with more speed, lower cost and better security will be very apparent. Over time, smart contracts will become increasingly sophisticated and function along with other innovations in ways that will revolutionize the global economy. As competitors and regulators adopt these new technologies, they will be very difficult for any business or industry to ignore.