AGORACOM Small-cap Investor Relations Blog

Blockchain is the operating system that makes bitcoin work. Bitcoin, a digital currency, has been used to purchase real estate. (Gillian Flaccus/AP)

Bitcoin is one of our new forms of money. Thousands of merchants now accept bitcoin payments. A Miami penthouse was listed for 33 bitcoin (valued at the time of listing at $544,500), and the seller refused to take any other currency. They were probably trying to avoid paying anything to the IRS.

What is bitcoin? The concept is so new that it wasn’t added to Webster’s Dictionary until this year: “a digital currency created for use in peer-to-peer online transactions.”

How does it work? Compare it to the operating systems for our iPhones. Blockchain is the operating system that makes bitcoin work. This column will attempt to explain Blockchain.

Let’s go back to Websters: Blockchain is “a digital database containing information (such as records of financial transactions) that can be simultaneously used and shared within a large decentralized, publicly accessible network.”

Perhaps a more understandable definition can be found in an IBM report called “Blockchain for Dummies”: “Blockchain is a shared, distributed ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible — a house, a car, cash, land — or intangible, like intellectual property, such as patents, copyrights, or branding. Virtually anything of value can be tracked and traded on a Blockchain network, reducing risk and cutting costs for all involved.”

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For example, a couple of months ago, Vermont Gov. Phil Scott (R) signed a law allowing the creation of Blockchain-based limited liability companies. That law also requires a study on the use of Blockchain in insurance and banking. And the city of South Burlington, Vt., has started a pilot project to record title and ownership.

Why is it called Blockchain? It’s called that because it involves computerized “blocks.” Unlike paper ledgers that are typically pages long, when someone adds new information, a new block is created that links itself to previous ones. These blocks form a continuous chain, thus the name.

The best way to explain this complicated process is with a simple example, courtesy of Joseph Murray of the public accounting firm of Withum:

“Company A wants to purchase $500 worth of goods from Company B; this purchase would be included in one block on the Blockchain. The vendor, and other parties within the Blockchain, would then be notified of a payment of $500 in return for goods. This transaction is then confirmed by nodes within the Blockchain, and once the pre-required number of parties confirm the accuracy of the transaction, the $500 is moved from the customer’s bank account to the vendor. If there are not enough confirmations, meaning parties cannot agree that these transactions are accurate, the block is not validated and the transaction is not executed.”

Without Blockchain, there would be numerous emails, phone calls and lots of paperwork for this simple transaction.

And, unless carefully encripted, this $500 transaction might be available for everyone — including scammers — to see and act upon. In our example, both A and B hold what is known as a “wallet.” This is a private key that only you have. You can, of course, give me a public key to expedite the transaction, but you can limit the availability.

There is much more to Blockchain than can be presented in a short column. You have to learn about miners who create blocks for a fee; you have to understand “nodes” and “masternodes” to get a better idea of how this operating system really works.

What does it have to do with real estate? In 2016, Goldman-Sachs projected an annual $2 billion to $4 billion savings in the title insurance industry as a result of applying Blockchain to title examination. As discussed earlier, Vermont is in the forefront of trying to put title documents routinely in Blockchain, and the Swedish government recently started using Blockchain to register land and properties.

According to Lantmateriet — the Swedish land-ownership authority — land titles are already highly digitized and on a paperless system. However, despite the system, it still takes several months between signing a contract and finally registering a sale. With Blockchain, Swedish officials suggest, it could be just hours.

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What are the potential real estate applications here in the United States? Clearly, it can be applied to buying and selling both commercial and residential real estate — and registration of ownership as is being developed in Sweden and Vermont. But any aspect of real estate which requires ledgers — such as property management — is also a prime candidate for Blockchain.

The title insurance industry is raising concerns that Blockchain alone is not an absolute panacea. “There is more to title than just the effective recording of documents,” said Steven Day, president of the American Land Title Association (ALTA). “There are covenants, easements, mortgages, leases, legal descriptions, on and on and on, that impact the title of a property. And many of these rights that impact the title are recorded within documents several steps back in the chain, and are not always adequately reflected in current recorded documents.”

The title insurance industry makes the point that a digital ledger will not detect a forgery. Nor can it identify a foreclosure defect — a defect which can make title unmarketable. Their position: Even though the Blockchain technology has a promising future to make current systems more productive, it can never provide a home buyer the protection offered with a title insurance policy.

The jury is still out on whether Blockchain is adequately secure and will reduce costs for all transactions.

Benny L. Kass is a Washington and Maryland lawyer. This column is not legal advice and should not be acted upon without obtaining legal counsel. Send questions to [email protected].

Source: https://www.washingtonpost.com/realestate/does-the-future-of-real-estate-include-blockchain-technology/2018/07/12/0a556a50-7bdf-11e8-aeee-4d04c8ac6158_story.html?noredirect=on&utm_term=.2322492d4715