Block by block
Blockchain is the little-understood, much-studied technology of the modern investment world. And, while it may not be entirely ready to shine, plenty of players are planning their future architecture around it

Launched into the limelight as the platform sustaining bitcoin, blockchain is the little-understood, much-studied technology of the modern investment world. And, while it may not be entirely ready to shine, plenty of players are planning their future architecture around it.

A distributed ledger technology (DLT), blockchain offers a shared database that maintains and updates information immediately, providing a single, shared record of information that, in theory, remains that way forever.

Avi Spielman, founder of Joon Properties, explored the application of DLT to the real estate industry in his 2016 thesis, Blockchain: Digitally Rebuilding the Real Estate Industry, submitted to the Program in Real Estate Development at the Massachusetts Institute of Technology.

Spielman focused on recording property records, exploring the benefits and limitations of blockchain compared to current recordkeeping systems. In his thesis, he described blockchain as “a distributed database holding a public ledger of all transactions”.

He said: “What makes the blockchain a transformative innovation is that every node on the network has a complete or partial copy of the blockchain and all historical transactions. These transactions are also timestamped on the blockchain. This eliminates the need for a central database and ensures that a single user is unable to fraudulently manipulate the data.”
With regards to real estate, this means property data, including public registry data, could potentially be more easily tracked and recorded each time a property changes hands.

In the Netherlands, Deloitte is currently working with the City of Rotterdam and the Cambridge Innovation Centre (CIC) to develop its proof-of-concept for an application on distributed ledger technology that digitalises lease contracts, allowing start-up businesses to rent office space more quickly and with more flexibility.

The blockchain creates an immutable record of all transactions, meaning due diligence for those transactions is made much easier. Jan-Willem Santing, manager at Deloitte Real Estate & Partnerships, says: “We want to use the blockchain as a single shared source of truth.”

“Today it takes a long time to get trusted facts about real estate. A blockchain application can make that more efficient—everyone can be working off of the same information to do their individual job.”

Santing suggests that for an appraiser, for example, some 40 percent of time is dedicated solely to collecting data. A blockchain could mean that this information is instantly available and, crucially, reliable.

However, several challenges have been identified with regards to the practical use of the technology. Spielman said in his thesis: “As with all new technologies, for blockchain to gain widespread traction in the real world, some significant challenges will need to be solved, including standards, privacy, speed and performance.”

According to Jacob Boersma, risk services manager at Deloitte, it will strongly depend on the kind of data that is put on the blockchain. He says: “You need to think about which information is made public and which needs to remain private.”

Because of the distributed nature of the technology, data stored on the blockchain is very secure, from a robustness and resilience standpoint.

Boersma says: “A blockchain has strong data integrity built in. Once data is on the blockchain, it is practically impossible to tamper with it. It’s verified very strongly by the whole network.”

He adds, however, that confidential information should either not be placed on a blockchain at all, or only placed on one using strong encryption. He says: “You should be very confident in the encryption you use.”

While scalability has been named as a significant issue in other areas of financial services, this may not actually pose such an issue in the real estate space.

Wilfrid Donkers, a director in the real estate financial advisory practice at Deloitte, says: “The volume of transactions is low, especially compared to something like payments, and so the technology is quite fit-for-purpose already.”

Boersma adds, however: “At the same time, the open-source community is working to improve the speed of transactions across the board for open blockchain networks.”

While more advanced, faster, technology may emerge in the future, it is wise to start with the use cases that are currently available, he
says, not only because it already works, but also to “develop literacy in the technology”.

Another potential barrier to adoption has been identified in the regulatory regimes that will apply to any new innovation.

Santing points out that “regulation is a broad thing” that will differ depending on the region, while Boersma adds: “There are some countries that are quite hostile, especially towards things like Bitcoin, in their regulation.”

That said, in the UK, the Financial Conduct Authority is working with blockchain financial technology companies, and is making an effort to generally support and encourage development in this area of fintech.

Perhaps more significantly, in February the European Securities and Markets Authority also acknowledged a number of potential benefits that distributed ledger could bring to the European markets, including improved efficiency and reporting capabilities, and reduced costs.

In the Netherlands, according to Santing, the public institutions are all showing interest in the technology.

He says: “Naturally, the government can be hesitant, but in the Netherlands the government is looking at it in a positive way and making things happen. They’re encouraging people to make pilots and to experiment, in order to better understand a future where blockchain is at the centre of the market.”

“There are challenges for investors and regulators, but they want to be proactive in facing those challenges. They want to understand the possible implications of the technology for their industry.”

Regarding the Netherlands in particular, Boersma says: “The whole framework of the current regulation is based on legal entities that can be held accountable by the regulator or the government, and held responsible for what they do with their data.”

“On a distributed blockchain network, where there is no single legal entity that can be held responsible, we could run into challenges.”

“Once something is on a blockchain, it is there permanently. By design, there is no central entity to amend or remove information if it is put on the blockchain illegally”

A major consideration going forward will be making sure there’s a bridge between the technological reality and the legal reality. There is no point in having technology that cannot be use for transactions in practice, because it doesn’t meet the current legal requirements.

In theory, transfer of ownership can be made much easier through use of a blockchain but, in a legal context, Boersma raises the issue of what happens if ownership has to be transferred without the previous owner’s approval, for example in the case of bankruptcy.

This would usually be ordered by a judge, and “this will have to be accommodated by the technological solution”, he says.

However, Boersma adds: “If there is a positive attitude towards the technology, then there can be a constructive dialogue with regulators and regulation will not stand in the way.”

There are initiatives coming about, but mainly proof-of-concepts, for example around land registry, information sharing and digital identities.

Deloitte’s own solution focuses on setting a standard for the real industry as a whole, and putting lease contracts on the blockchain is a first step. Deloitte is taking further steps to facilitate pay-per-use office space, requiring a technology that would allow ‘smart offices’ to monitor the use of a building in real time, and process payments for the use.

This meeting of the digital and physical worlds is something that is likely to continue with the dawn of the internet of things combined with the possibilities of blockchain technology.

Similarly to Spielman, however, Donkers points out that, at the moment, we are talking about proof of concepts, saying: “The application needs more development in order to be used in a production-environment.”

Citing the hurdles that need to be overcome on the route to adoption of a blockchain solution, Spielman said in his thesis: “Without getting lost in the psychology of human nature and the natural resistance to change, there also are industry-specific hindrances that would need to be overcome, starting with convincing all the players in the real estate space that this new technology is the future of recordkeeping in one form or another.”

That said, once the technology is developed enough to smoothly solve an existing problem, then users are less likely to realise it’s there at all. And this is the eventual aim.

Donkers says: “You shouldn’t have to explain blockchain, especially not the details of blockchain, to the users. They should just see a very easy-to-use solution that fixes a problem they experience.”

He concludes that, through sharing knowledge, mistakes and all, industry participants can learn from each other, creating products that solve genuine problems facing the industry. He says: “Through sharing knowledge, the industry gets better as a whole, and that is the best way to innovate quickly.”
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