Legal obstacles to mass blockchain adoption in the real estate industry

One of the blockchain’s most prominent features, the reduced need for personal information, works against blockchain’s mass use. Without a clearly established legal identity, there is a higher chance of money laundering and other illegal activities, so banks would be less likely to grant mortgages if a person does not use a verified ID. The legal frameworks for real estate are complicated enough that an official ID is not sufficient to proceed with most of the real estate transactions, making notary aid essential in many cases. Traditionally, a notary would verify a person’s legal capacity to conclude transactions, as it cannot be checked just by looking at a person’s ID. Although not every action requires such a deep verification, granting a mortgage, for example, requires the notary and proper land register, which cannot be done without a very careful examination of personal information. As a consequence, at the moment, blockchain technology is unlikely to replace notary assistance. Nevertheless, it could definitely help with rental contracts, which are not as heavily regulated as property purchases or mortgages. Does it mean that blockchain’s mass adoption in the real estate industry is off the table? Not at all. In fact, certain parties suggest that the ID should be either managed by a central authority or blockchain technology, under the condition that users’ identities are internationally recognized and safely stored. Certain companies, like Accenture, encourage the implementation of a blockchain protocol that would permit the use of official IDs. Accenture actually signed a deal with Canada and The Netherlands to improve their entire travel system, especially custom, and border control thanks to the use of a blockchain-based ID. To overcome technology-related limitations, regulators can take notes from notaries’ practice and use precautions to ensure legal security. 

 

As lawyers, notaries, and land registries are often used to ensure legal compliance within the real estate industry, blockchain cannot simply replace them, as it is a distributed database, so it is not designed to automatically check legal requirements. Although smart contracts require fulfillment of certain preconditions, they neither perform any background scans nor review the fairness of transactions’ terms. Traditionally, it is a lawyer’s and a notary’s responsibility to detect unfair behavior and monitor transactions to prevent illegal funding. How could blockchain overcome obstacles connected to the contract’s legality? One solution is to allow lawyers and notaries to participate in the blockchain-powered transaction process to provide real-time verification of every transaction. With the use of “notarial seal of conformity”, notaries could verify contracts’ compliance with EU consumer legislation. Many experts also talk about implementing AI-based solutions for smart contracts to compare contract clauses with databases of dishonest individuals, who have already had a history of real estate fraud, to minimize the risk of unfair transactions. Although such solutions would be designed mostly for real estate purchases and mortgages, it is possible to improve the system of rental contracts with the use of AI and blockchain. Rental contracts are usually not registered in the land registry, but technology could give tenants more control over their contracts. 

 

Although blockchain-powered solutions create numerous possibilities regarding property rights, for example, allowing for fractional ownership, it is still difficult to turn certain rights into the code of smart contracts. Co-ownership with different shares, the right to build, the right to use, temporal ownership or shared ownership are all challenging to translate into blockchain code, but are common enough in the real estate industry to pose a problem if they are not addressed properly. To avoid legal disputes, obligations, and rights of the rights holder have to be available for all parties of any given transaction. It would be a bare minimum to leave information about the property’s status and type of token in the Land Registry information to avoid legal disputes between citizens and minimize the chances of real estate fraud. Luckily, it is possible to attach certain rights to a token, so when it is transferred through blockchain, certain rights can be also easily transferred to the next owner.  

In short, if new solutions emerge to address the complexity of property rights, blockchain’s expansion to the real estate industry will be quicker. Back in 2018, Brazilian regional government groups and private industry players decided to collaborate on the blockchain-powered antiquated land titles registration system, suggesting that the technology can be used in the traditionally fixed real estate systems. 

 

Although blockchain’s unchangeable nature often works in its favor, when it comes to real estate there is an enormous need for reversibility of transactions. Why? In the case of illegal activities, operational errors, or breach of a contract, property rights might need to be revoked. Unless blockchain allows amendments or there is an assigned authority to order new transactions when necessary, blockchain’s potential use in real estate might be limited. 

 

All in all, blockchain technology’s potential in the real estate industry is great, provided that there will be a clear, regulatory framework, which combines proven, notarial practices with innovative, effective blockchain-powered solutions. Most of the obstacles related to blockchain’s use in real estate can be effectively addressed with the help of new protocols, or experts’ help, so once the industry agrees to take a chance on the blockchain technology, real estate’s future might look very different from yesterday’s predictions.

 

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