BitCoin, Blockchain, Smart Contracts and Property… what’s cryptocurrency got to do with a Land Register?
In the final part of Forming the Future series, we explore the potential impact of blockchain (distributed ledger technology) in the context of land administration, the early application of this technology in jurisdiction around the world, and the potential benefits, concerns and issues for title based systems – warning does get technical.
Land Registries and Block Chains, Smart Contracts, Smart Property
In 2008, the yet to be identified, Satoshi Nakamoto published a paper that described a system for the secure exchange of digital currency that would allow online payments to be sent directly from one party to another, without going through a financial institution or intermediary, i.e. a secure peer to peer currency transaction system. The first implementation of this concept is known as Bitcoin, a ‘crypto-currency’ used to describe the network and protocols that use cryptography to secure transactions – without the need for third party validation. Shortly after this paper was released it was followed by an open source program implementing the new protocol, allowing anyone to become part of the bitcoin network. Today the word Bitcoin designates the currency used as a unit of account on this network.
The technology underpinning the Bitcoin digital currency system is known as a blockchain, essentially a special kind of distributed database for maintaining an immutable ledger of all transactions. The Bitcoin blockchain stores cryptographically signed records of transactions, but blockchain systems can store any kind of data, and represents the required platform for smart contracts. The idea of smart contracts goes back to 1994, when Nick Szabo, first introduced the concept of using computer protocols to facilitate, verify, and enforce the negotiation or performance of a contracts, making contractual clauses unnecessary. Smart contracts support smart property, where assets can be registered and transacted, with the blockchain technology used to track ownership or the provenance of documents, digital assets, physical assets or even voting rights.
Recently the use of blockchain technology, smart contracts and smart property have been considered and in some early cases implemented, in the context of land registration and administration. In the rest of this paper we look at the benefits and issues with these technologies to land registry transactions, property rights and real property as an asset class.
Block Chain based Land Registry?
Block Chain technology is being trailed in several countries around the world, including in Dubai, India, Georgia, Sweden and the Ukraine, as land registries look to digitize, improve integrity of their land register, and become more efficient in land administration. In other countries, government actions, unethical interventions from corporations and the natural disaster (causing a loss of records) have also prompted investigations to the potential use of block chain for land administration – e.g. Haiti.
How Blockchain could help
The critical need for land administration is maintaining the integrity of a land register in terms of the ownership and correctness of the details associated with the land parcel in question. Today this responsibility is given to government agencies to administer, as a trusted centralized authority, the land within their jurisdiction – e.g. Land and Property Information in New South Wales, Landgate in Western Australia.
Many commonwealth countries use a Torrens based system of land title in which a register of land holdings maintained by the state guarantees an indefeasible title to those included in the register1. Land ownership is transferred through registration of title instead of using deeds.
A Blockchain-based land register must first meet the same requirements of security and data integrity of land titles, but how it achieves that would be very different. Land ownership would be controlled by the blockchain as smart property, using contracts. The registry would also be responsible for genesis transactions (initial block) in the form of new land parcels (e.g. the release of crown land to freehold) and then tracking ownership through transactions against that land parcel (subsequent blocks representing transactions against previous blocks/transaction), i.e. transfers, denoting the original owner’s identity and the new owner’s identity in a block within the blockchain. In this way, the register would be trustworthy by;
- Establishing ownership consensus through immutable transactions and proof of transaction execution making it almost impossible, and certainly cost prohibitive, to amend historic records thus maintaining the integrity of the register holding land titles.
- Guarantee data correctness automatically by the protocols used and potentially data associated with the land title.
- Identity of owners established using modern cryptographic techniques common in digitized processes (public and private keys).
In a normal Bitcoin blockchain, bitcoins are fungible (land parcels are not). However, it is possible to create non-fungible tokens by tracking a specific "coin", called coloured coins, through the transaction history2, which is preserved in the blockchain (e.g. a land title)3.
Colored Coins could be applied to land administration by representing the ownership of a piece of land by single or multiple tokens. The metadata associated to the token can be used to track public registry details such as land parcel size, GPS coordinates etc. (meta data isn’t stored directly in the blockchain, but linked to the token). The information attached to a token can also be encrypted by the land administrator so only those with the correct private key have access to the information.
Any person who is connected to the internet (or granted access to a private blockchain) can verify and track the ownership of each token using block explorer software, for example conveyancers and lawyers involved in the sale and settlement of property transactions. The process of representing the land with a colored coin token is the way in which land can be represented as smart property.
Private keys are also used to sign documents and transactions to ensure a specific person is the actual owner, and the transactions are valid. Validating transactions would be the combined responsibility of the land administrator4, and the owner of property, allowing the use of smart contracts for the transfer of property and sales to be executed. Other conditions can be codified to help further reduce fraud and expedite settlement (financial transactions). Lenders and conveyancers place funds into trustless escrow accounts only to be transferred if payment is received or the proper contracts executed.
There are also other advantages the block chain technology brings, beyond trust;
- Resilience: In a distributed block chain based registry every node would have a full copy of the register (ledger). This level of redundancy, in today’s registries, is costly and not always reliable.
- Non-Repudiation: Most centralized land registries rely on trusted parties and due process to maintain and full audit trail of land ownership, but in jurisdictions with with weaker institutional control powerful self-interest can disrupt due process.
- Open Data: Every transaction is visible and available to everyone (in a public blockchain). Every node on the network has all the information they need for an audit of every transaction.
- Efficiency: Removing hand-offs and intermediaries, efficiency of the system can increase. Existing efforts such as PEXA for property exchange settlement could be expanded beyond settlement with other parts of real estate processing being triggered within the blockchain.
Issues and Concerns
While block chain technology, smart property and smart contracts offer opportunities for more efficient and robust land administration, there are issues and concerns that need to be addressed, both technical and business. These issues and concerns can be addressed but may; still require some centralized governance, require additional technology solutions, and place limitations on the type and scope of blockchain that can be utilized. Below are some of the issues and concern most pertinent to the use of blockchain in land registries.
For many governments, they must consider the benefits of moving from a centralized land register to a blockchain-based system and the costs of that transition, a typical cost benefit analysis. These costs are significantly compounded when centralized registers are not yet digitized.
For countries still using paper records and paper lodgment of instruments, the move to digital records is a prerequisite for the use of blockchain. Given blockchain uses cryptographic hashing to ensure the integrity of records and information, digital data is required, you can’t hash a paper document! Note that both Sweden and Georgia had fully digitized systems before incorporating blockchain.
The transition to digital records and the potential use of blockchain also needs to consider whether; the registry needs to reconstitute a complete digital history or move to digital and blockchain from a designated point in time;
- Complete Digital History: Convert all records to digital and populate the blockchain with those transactions, all the way back to genesis transactions (e.g. release of crown land to freehold), and creating a fully digitized history.
- Designated Point in Time: Validating and converting the current title holder and information, and then use blockchain to record transactions against that point in time digital record (i.e. creating a digital genesis record that subsequent transactions can be recorded against in a block chain).
Whether a registry requires a fully digitized history or not, it needs to be digital when blockchain is incorporated.
Registries tell us who has what rights to which asset, so certainty that “the who” is valid is critical. Blockchain itself does not incorporate a trusted identity system (although it could be used to create one), so any blockchain based registry will have a dependency on a separate trusted authority, that identifies all the parties that want to transact with the registry. In many developed countries government are implementing or using digital identity services (e.g. GovPass in Australia).
Associated with your digital identity, blockchain uses private and public key cryptography, to authenticate a party and allow them to transact, but what happens if someone steals, or you lose your key? This is where there needs to be protection and pathways to recourse for fraudulent or incorrect transactions;
- For protection against fraudulent transactions, multi party signatures (multisignature) could be used5. Multisignature requires more than one key to authorize a transaction. Generally, blockchain transactions require only one signature — from the owner of the private key associated with the asset being transferred. However, blockchain can be configured to require the signatures of multiple parties before any asset can be transferred. This again could mean that a trusted third party, like a Bank involved through e-conveyancing or perhaps the authority maintaining the register (the registrar) would also sign off on the transaction before its executed and recorded.6
- For recourse, either dictated by court order or by authority of the Registrar, there would be a need for compensating transactions (another transaction reversing the prior one). For example, when a court rules on ownerships where there is a conflict, or perhaps when an owner loses their private key or passes away without allocating ownership or rights.
Integrity of the Register
One of the benefits of a blockchain is that it is immutable, however this poses two problems for land registries recording rights in a blockchain based land registry;
- Many countries already have land records (paper or digital), others have no records at all. Establishing new or existing data on a blockchain requires validation of the records being added - i.e. genesis transactions representing the correct ownership, property rights and details at that time. The transition to blockchain would require data cleansing/formatting and verification, something that could be done as part of a digitization process, but who is responsible for the accuracy of that initial data? In the case of crown land releases to freehold (genesis transactions for new parcel creation) that is the purview of government or a trusted authority representing them, which brings us back to the need for a trusted centralized authority to establish the initial assets and rights on the blockchain.
- In a block chain land register, data integrity would rely on cryptography and consensus to validate transactions, that are then immutable. In the real world however we must deal with conflicts after the fact and allow ownership to be changed (as detailed above). This again may require a trusted party responsible for any compensating transactions needing to be added to the blockchain, ensure the registry is updated and compliant with court's orders and/or to reassign ownership.
Privacy and Open Data
As stated, a blockchain based registry would require a validated identity system instead of creating its own. However, there is no universal format for blockchain-based registries, and given instrument data, processing, and registration rules, requirements would differ across jurisdictions. Land registers would likely exist on a private blockchain in some form, because;
- There are different courts and registration authorities responsible for legal claims and land ownership in different jurisdictions (they are the only parties that would be allowed to make changes to a blockchain based register, through compensating mechanisms).
- Volume of information associated and storage requirements for land parcels and title information would not lend itself to a public blockchain implementation. It is more likely that the blockchain register contain just the data specific to that jurisdiction, therefore distributing the storage and processing needs
- Registries need to know the identities of who is registering or transferring property. A public blockchain allows anyone, and anonymity, in transactions. A private blockchain is required to validate the correct party, not just the correct keys, are transacting with the registry.
Policy and Legislation
One of the challenges and a prerequisite, for jurisdictions with established registers is the development of policy and legislation to support a change to blockchain. The evolution to a blockchain based land registry could follow; and normal path as we have seen in Australia with jurisdictions making legislation changes for the adoption of new technology and processes e.g. e-conveyancing, or a more disruptive path with new commercial service providers (without a regulated or centralized model) disrupting the centralized/legislated regime, as we have seen in other industries - e.g. Uber and Airbnb.
Blockchain offers some compelling technology and business benefits to land registration and administration. For jurisdiction with no, or limited, centralized land recording systems it offers a way to establish land records and a process of indefensibility of ownership and rights. However, for those countries with well-established land registries, title based of deed based, there are issues and concerns that will need to be addressed for its wide scale adoption, even with the potential cost savings and efficiencies it can bring – e.g. the potential elimination of title insurance from deed based systems.
In existing Torrens based jurisdictions it is likely to be several years before blockchain is adopted given; the various issues and complexities and concerns that exist, the prerequisite to be fully digitized, and the existing legislation and governance policy already in place for property rights, but the question is then about timing not its applicability.
is a digital asset and a payment system invented by Satoshi Nakamoto, who published the invention in 2008 and released it as open-source software in 2009. The system is peer-to-peer and transactions take place between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called the block chain, which uses bitcoin as its unit of account.
A block chain, or blockchain, is a distributed database that maintains a continuously-growing list of data records hardened against tampering and revision. It consists of data structure blocks—which hold data, and both data and programs —with each block holding batches of individual transactions and the results of any blockchain executables. Each block contains a timestamp and information linking it to a previous block.
Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that make a contractual clause unnecessary. Smart contracts aim to make contractual clauses partially or fully self-executing, self-enforcing, or both. Smart contracts aim to provide security superior to traditional contract law and to reduce other transaction costs associated with contracting.
Smart property is property whose ownership is controlled via block chain technology using contracts. Examples could include physical property such as cars, phones, land or houses. Smart property also includes non-physical property like shares in a company or access rights to a remote computer. Making property smart allows it to be traded with radically less trust, and can reduce fraud and mediation fees.
Genesis Transaction (block)
A genesis block is the first block of a block chain. The genesis block is almost always hardcoded into the software of the applications that utilize its block chain. It is a special case in that it does not reference a previous block and is the root for all transactions against a specific asset.
A cryptographic hash function is a hash function which takes an input (or 'message') and returns a fixed-size alphanumeric string. The string is called the 'hash value', 'message digest', 'digital fingerprint', 'digest' or 'checksum'). ... It is extremely easy to calculate a hash for any given data.
Public Key Cryptography
Public key cryptography, or asymmetrical cryptography, is any cryptographic system that uses pairs of keys: public keys which may be disseminated widely, and private keys which are known only to the owner. This accomplishes two functions: authentication, which is when the public key is used to verify that a holder of the paired private key sent the message, and encryption, whereby only the holder of the paired private key can decrypt the message encrypted with the Public Key.