Real Property on the Blockchain: Transfers of Twig and Turf
Tokenized realty, old and new
"The oldest forms of common law provided that a valid conveyance of a feudal tenure in land required physical transfer by the transferor to the transferee in the presence of witnesses of a piece of the ground itself, in the literal sense of a hand-to-hand passing of an amount of soil, a twig, key to a building on that land, or other token."
- Wikipedia, Livery of seisen
Who doesn't love the archaic feudal language around real property conveyancing, where verbs are in triplicate, and the critical moment is delivery of a document to evidence the "deed" of handing over a bit of twig and turf? Just about everybody, it seems. Real property conveyances in English law jurisdictions are obscure even to sophisticated parties, who get through the process with the help of an assemblage of lawyers, title examiners, insurers and escrow agents. These latter service providers are described in the blockchain world as "trusted intermediaries", and vigorous efforts are under way to replace them. Their replacements, if innovators have their way, will be blockchain-based systems for direct transactions between seller and buyer, with more speed, lower cost, 24/7 transparency, and reduced susceptibility to fraud or mistake.1
How are they doing? Here's a quick breakdown by type of jurisdiction:
1. Deed-based Systems (Including Most of the U.S.)
In deed-based jurisdictions there is generally no issuance of a title certificate by a governmental authority. Parties to a transaction are responsible for the recording of deeds and other instruments affecting title, and also for checking the registry to determine what competing interests may be held by others. Most buyers rely for this process on title companies to provide title exams and insurance. The challenging issue for blockchain transfers in these jurisdictions is that the statutes invariably provide that a transfers of real estate must be ‘of record' in a government-sponsored registry in order for it be enforceable against third parties without notice.
In blockchain pilot projects to date, there have been on-chain transfers that may have created contract rights between the parties, but at some point in the process, in order for a transfer to have validity under state law the transfer is also recorded in a traditional way in the appropriate land registry. A blockchain transfer2 also does not obviate the need for the buyer to undertake the normal process for title examination and insurance, since interests of record under the statutory system can affect or supersede a blockchain-based real property interest.
Takeaway: Transfers of real property interests on the blockchain transfers will be equivalent to conveyances by deed only when (or if) the laws of every local jurisdiction are changed to provide that blockchain transfers will have the same effect as recordation under current law. Until then, file your deed. (Please note that this applies only to interests that are real property under the Common Law. For interests related to real estate that are personal property, including real estate investment trusts (REIT) and other trust interests and rights to payment under securitization arrangements, see the discussion below.)
2. Centralized Land Registries
These systems, where title is determined authoritatively by registration and issuance of a certificate of title by a governmental authority, are found in much of the world outside the U.S., including Commonwealth countries that have adopted variants of the Torrens System promulgated under British colonial administration. In Australia, a project is under way by the Open Law Team to explore the potential for blockchain real property transfers based on the ERC721 non-fungible token standard. While activity to date relates only to creation of a sales contract, the thinking appears to be that the centralized system in Australia will prove more hospitable at some point in the future to governmental recognition of blockchain transfers. (By comparison, authoritative statements on the status of title from a governmental entity are generally not obtainable under a deed-based system like that in the U.S.)
Takeaway: This is one to watch. If successful here, the prototype could be exported to other parts of the world with centralized title systems.
3. Developing World Jurisdictions Without Any Effective Land Title System.
It has been suggested that blockchain title registration and transfer may be most useful in the short run not in commercially sophisticated regions, which already have in place vast and complex systems of one of the two types described above, but instead in vast regions in the developing world where there is no effective title system of any kind currently in place. The challenge in these areas will be to develop an accurate "root" of title, to avoid the garbage in, garbage out effect.
Takeaway: This will be the work of years, but it has the potential to unlock trillions of dollars in land value for personal and commercial use.
It's Complicated: It should be pointed out that current pilot projects for blockchain title transfer focus almost exclusively on one seller, one buyer, and fee simple title. An effective system for developed economies will also need to encompass an myriad of other kinds of real property interests, including mortgages and deeds of trust, easements, joint ownership and many other types of recordable interests that have sprung up over the centuries. This process has hardly begun.
A Distinction with a Difference: The result is very different for real property-related interests that are deemed to be personal property under English and U.S. Common Law. A quick rule of thumb is that if a property right does not need to be recorded in a land registry in order to be valid against third parties, then it's personal property. While many real-estate related financial products are built on recorded real property interests, the products can consist of a wide variety of interests and rights relating to payment streams, tranches, waterfalls, reserves, and equity or trust beneficial interests that fall on the personal property side of the traditional delineation. For these tokenization and disposition on a distributed ledger are in principle as doable as for any other real-world financial asset.3
2 In one highly-publicized experimental transaction in a specific Vermont jurisdiction, the local clerk's office allowed blockchain reference data to be stamped onto a paper deed
3 Holland & Knight attorneys have been engaged in one such effort, recently taking part in a successful test of the use of distributed ledger techniques to standardize the data used in the securitization of home loans for residential mortgage-backed securities (RMBS). The project will expand in the future to include other forms of securitization, including those applicable to commercial mortgage-back securities (CMBS) and other financial assets.