Real estate is an ever-evolving field, and in recent years, technological advancements have been modifying it even further. Such advancements include the emergence of blockchain technology. As the demands for transparency and security in property-related transactions keep on rising, the emergence of blockchain and smart contracts has become more prominent, which may completely change the traditional norms of real estate transactions soon.
Since real estate transactions in a traditional sense are often regarded as extremely time-consuming, which may even involve fraud or disputes, the use of blockchain technology shall lead to a much more secure and efficient approach towards such transactions. Blockchain technology refers to a secured ledger system that touches various aspects of a property transaction, such as ownership transparency, fraud prevention, tokenization, decentralized registration of lands, and dispute resolutions. Blockchain technology tends to provide a more secure system for verifying and transferring property-related information during a real estate transaction, which also eliminates the extensive paperwork, therefore, saving time and making the entire transaction smoother.
BENEFITS OF BLOCKCHAIN TECHNOLOGY IN REAL ESTATE LAW
- Transparency: Transparency in blockchain technology happens to be one of the best advantages that blockchain has to offer. As mentioned earlier, blockchain technology is an online secured ledger that tends to contain information related to the parties and property relevant to the real estate transaction. Such information is available to all the parties privy to the contract, therefore, it drastically reduces the risk of fraud or misrepresentation of any kind, and hence, fulfilling one of the biggest requirements necessary for a valid contract, which is free consent, hence, transparency is indeed a significant part of blockchain technology and it is strongly promoted.
- Security: Transparency gives way to security, the relevant information of a property is really hard to alter in the ledger, and this minimizes any potential for fraud or unauthorized modifications relating to the ownership of the property. Such a strong combination of transparency and security in blockchain technology tends to ensure the integrity of the property and ownership records which helps in building up trust among the parties.
- Smart Contracts: Blockchain technology provides smart contracts, these are paperless digital codes that tend to contain a set of predefined promises on conditions that are mentioned in advance along with an execution date, which shall be decided and agreed upon by the parties, mutually. The same happens on a decentralized online network of blockchain, designed specifically for this purpose. It may initiate an automatic transfer of ownership once payment is confirmed, making it hassle-free, smooth, and free from any potential misrepresentation.
Illustration: A wants to sell his property to B, as a result of which they decide to enter into a real estate transaction, and the transaction is to be executed by an E contract under the blockchain ledger. Here, all the information regarding the property is available for access to both parties. The pre-specified condition in this contract can be the prior payment of 95% of the total market value of the property, which shall be transferred into A’s respective bank account by B on a predetermined date. Upon the completion of the task, B may have possession of the property.
- Tokenization: Tokenization blockchain technology enables real estate transactions in the form of tokens the ownership of a property is reflected by digital tokens, and these tokens are traded among the parties to transfer the property or a share of that property, making it simpler. In addition to that, it also makes the transaction less time-consuming as it eliminates unnecessary paperwork and middlemen. Tokenization also promotes fractional ownership, under which an investor may choose to buy and hold just a fraction of a property, instead of purchasing the entire property. This reduces the risk factor and also gives the investors a chance to invest in multiple properties.
- Reduction of Cost: Due to concepts like smart contracts and tokenization under blockchain technology, tend to eliminate the middlemen and reduce the unnecessarily lengthy amount of paperwork too. This results in an increased efficiency which contributes to a significant cost reduction in the real estate transactions. Blockchain technology may make a terrific contribution to the economic growth of the real estate market as such cost efficiency may attract a broader range of investors to the market in the upcoming future.
- International Transactions Made Easy: Blockchain technology helps make the real estate market wider, as tokenization and smart contracts allow for more straightforward international transactions between parties, by eliminating the complexities of cross-border exchange. Therefore, it allows investors around the globe to explore and get into transactions without having to worry about lengthy paperwork, middlemen, high costs, and fraud.
CHALLENGES IN THE IMPLEMENTATION OF BLOCKCHAIN TECHNOLOGY
- Jurisdiction: As we saw earlier, blockchain technology makes it easier for real estate transactions to occur on a global level, attracting international investors which shall make the scope of the market far wider. However, it is important to understand that due to such transactions happening across different jurisdictions, identifying the appropriate and relevant law would become just as challenging. Every transaction will require the blockchain to work in absolute compliance with a massive amount of various legal rules and regulations, making the process extremely complex for the involved parties. Moreover, it may become even more complex in case of a fraudulent exchange.
- Distinguishing between Transparency and Data Privacy: As we know by now, blockchain technology has an extremely heavy focus on transparency to avoid any potential fraud, providing as secure of a transaction as possible. However, drawing the line between transparency and data privacy can be extremely challenging at times. This can be the case, especially in a market such as real estate, as it is always hard to distinguish between confidentiality and transparency of sensitive property-related information, as it may end up directly affecting its market value.
Illustration: A wants to sell his property to B, therefore, he enters into a smart contract with B under the blockchain ledger. However, complexities may arise when the blockchain will be required to comply with the General Data Protection Regulation (GDPR). Hence, information related to the property and parties that may be classified as confidential will still be required to be shared with a legal authority regardless.
- Reliability of Smart Contracts: Although smart contracts eliminate the need for lengthy paperwork and the conditions of a transaction can be rewritten in a smart contract too, at times, the complexities of real-life issues may hamper the functioning and efficiency of smart contracts. This may jeopardize the entire transaction, leading to potential disputes among the involved parties. Therefore, careful monitoring of smart contracts before their execution becomes mandatory.
- Performance-related Challenges: Since blockchain technology aims to promote international real estate transactions, it is obvious that the number of investors is going to be extremely massive, that being said, it is important to note that blockchain is an online ledger, and a large database will be required to cater to such investors. Therefore, performance-related challenges imply the running of such a massive database, which shall put a massive amount of load on its connection and speed. Hence, the smooth functioning of the entire real estate market will depend upon the performance of the relevant database and its speed.
- Awareness and Acceptance: Blockchain technology is still a relatively new concept, and most investors in the real estate market are not even familiar with it. Educating the parties in the real estate industry will be extremely challenging. Concepts like smart contracts and tokenization may still take time to become common in day-to-day real estate transactions. Moreover, such relatively newer concepts will also require acceptance from investors all across the globe, therefore, the growth potential is slow.
In conclusion, it can be stated that blockchain technology indeed has the potential to transform the entire real estate market by replacing traditional norms with newer and more efficient concepts, such as smart contracts and tokenization. Not only do such concepts focus more on security and transparency, but they are also more hassle-free and time-efficient. Furthermore, since they eliminate the need for middlemen and lengthy paperwork, they tend to be more cost-effective too.
However, the road to the implementation of blockchain technology tends to be full of challenges, whether be it issues related to data privacy, issues related to smart contracts not being compatible with real-life complex scenarios, or maybe the investors in the market simply not being aware of blockchain and its concepts. Overcoming such challenges will take time, and countering such challenges becomes crucial for blockchain technology to work at its full potential, which shall transform the entire real estate market as we know it, as the future holds the promise of transactions that will be much more secured and transparent than what we have today. Therefore, the journey is indeed complex and slow, yet the potential for growth remains just as prominent and strong as ever.
Author(s) Name: Husain Rizvi (Rizvi College of Law, Mumbai)
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