Technology can help avoid litigation over real estate disputes

A few months ago, a friend of mine was relocating to India from the US and wanted to invest in a property in Hyderabad. After a painstaking search and browsing through numerous glossy brochures from real estate promoters, he zeroed in to an apartment. His due diligence also included calls to friends and relatives in India to validate his choice.

His dream comeback turned out to be a legal nightmare when it was found that the property he had invested in was constructed on land which had a series of disputes over its title. Fortunately the story had a happy ending after some out-of-court settlements were reached with those challenging the title. Disputes over real estate form a large chunk of the over 30 million cases awaiting hearing in the Indian legal system with millions of dollars locked up in these cases.

This is an ideal scenario, though not quite encouraging for the legal community as it will lead to fewer disputes to arbitrate, in which to introduce smart contracts in India through the use of blockchain. In simple terms, blockchain will create a set of digital, tamper proof set of records of all transactions relating to the piece of property, on a common ledger on the Internet.

A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises. The beauty of blockchain is that once a record is made, it cannot be changed unless every party in the transaction has agreed to the change. Smart contracts are mathematically programmed to perform their part of the deal once the other parties of the contract have delivered on their promises. For instance, a payment can be released once a transacted piece of property is handed over to the buyer and recorded in the blockchain.

If someone wants to add to the blockchain, participants in the network – all of whom have copies of the existing blockchain – run algorithms to evaluate and verify the proposed transaction. The transaction’s hashtag has to match the blockchain’s history. If the majority of the nodes reach a consensus as to the transaction’s validity, then it will be approved and added to the ledger. Blockchain is a transparent platform, the workings of which are open to examination and elaboration.

Now imagine if India had a blockchain of smart contracts for real estate, my friend could have easily traced the entire history of the property including the title of the land on which it was constructed. So, if the builder was trying to register in a property, in a blockchain, by purchasing it from a single owner the other owners would have been immediately alerted and the transaction would be been aborted right then if there was disagreement, thereby avert future litigation. However, for this system to function properly, the first requirement is to have a central registry of properties in a digitised form which is encrypted.

A critical requirement for a blockchain based real estate transaction would be a cryptographic trust through the establishment of a Public Key Infrastructure (PKI). PKI is a set of roles, policies, and procedures needed to create, manage, distribute, store and revoke digital certificates.

Blockchains could then coalesce with each other and also with existing PKI amalgamations. This would go a long way in accelerating collaborative governance on any future project. The creation of a PKI is key for the successful implementation of a blockchain system in India. Then one would also need a protocol, like the Uniform Economic Transfer Protocol (UETP) that links the buyer to the seller, the property, the payment, the bank, the smart contract, and the registry. These systems will provide the foundation for the successful implementation of a blockchain land registry in India.

Sweden too had a problem with its land registry records which lacked transparency. In a pilot project, Lantmateriet (The Swedish Mapping and Land Registration Authority) collaborated with Kairos Future (a consultancy), The Telia Company (Sweden’s dominant tele-network operator), and ChromaWay (a blockchain solutions firm) to develop an innovative way to address the issues plaguing the current land registry framework.

They devised a plan to create an application that would use blockchain technology to facilitate transactions. Communication between the various stakeholders (real estate agent, bank, buyer, seller, and the Lantmateriet) is conducted over the application. All information about the property (current owner, cadastral surveys, among others) is digitised and put into the blockchain.

Smart contracts then ensure that this digitised space is regulated by certain rules (i.e., Sweden’s regulatory policies). The application is then used as an interface to facilitate all transactions concerning a particular property. The purchase agreement is distilled down to a unique hash code and put into the blockchain. Banks, real estate agents, buyers and the Lantmateriet can substantiate the veracity of this purchase agreement and other documents through their unique digital signature (hash on the blockchain). Banks can also ensure that the buyer has enough funds in their account to carry out the transaction. The Lantmateriet can then register and grant title to the buyer.

In smart contracts, the software automatically executes a transaction without any requirement of manual enforcement. The transaction is either made to an account directly or to an escrow account created specifically for the transaction. The advantage of smart contracts is that it will definitely be executed irrespective of it being legal or illegal. Smart contracts have a self-executing deterministic nature.

There is no way out of a smart contract, it is mathematically impossible to breach a contract. Even efficient breach is not allowed. Due to this deterministic nature of smart contracts there would be no requirement of a third party! It is not just real estate, but virtually every transaction can be carried out through smart contracts recorded in a blockchain. Once this happens, intermediaries which deliver trust and transparency will be replaced by algorithms and businesses which thrive on dispute resolution will be disrupted forever.