July 31, 2017
This article began as a list of a few prerequisites and then was circulated to some advisors whose advice improved it greatly. We would like to thank Gabriela Andrade, Andrew Hinkes, Will King, Todd Miller, Frank Pichel, Michael Pisa, Ben Siegel and Noel Taylor for their time and inputs. Many insights here came from them, any mistakes are ours.
Bitfury, ChromaWay and growing list of other firms are engaging with property registries around the world, stirring up both excitement and concern. Using the blockchain to secure a land registry is far from a straightforward process, and it is too early for its advocates to declare victory. The growing interest, however, merits a deeper discussion of the necessary preconditions for applying blockchain technology to a property registry. In addition to listing what we believe are the prerequisites for implementing blockchain in a registry, we hope to further clarify what blockchain technology can and cannot do. (A question we do not address explicitly here -- since it merits an entire article -- is why use blockchain instead of other technologies?)
As Todd Miller of ChromaWay reminds us, the most significant obstacle to modernizing land registries is not technical, but political. A foundation of popular and governmental support is needed when building a transparent, efficient, and effective land registration system. It is important to remember that although technology can impact politics, it is neither a replacement nor a cure for broken political systems. Once the demand for action on land and property issues has gained momentum, however, the best technological tools must be chosen to fully capitalize on the opportunity.
Before blockchain is selected, however, we suggest these seven pre-conditions be met.
1) Registries should be as accurate as possible
One of the merits of a blockchain is that it is ostensibly immutable (both of those links are well worth reading) so it is important to make sure that any existing data that is transferred onto the blockchain is accurate. Jurisdictions looking to implement digital solutions are in one of three situations: they have a paper registry, a digital registry, or a registry that was destroyed.
All existing registries, whether digital or on paper, contain inaccuracies. Most sources of error are benign, but fraud and corruption always pose a risk to a registry’s accuracy. Simple administrative errors and property owners forgetting (or avoiding for tax purposes) to register changes also quickly render registries out-of-date.
Ideally, the registry should be cleaned and brought up to date before it is put onto an immutable blockchain. The reality is that stopping to clean a registry risks creating disputes that would bog down a tech transition for years. On the other hand, pulling a registry into a platform that allows more transparency and lower transaction costs (two commonly advertised attributes of a blockchain solution) could expedite and facilitate clean up. This is particularly true in the case of a paper registry. As Frank Pichel points out, it is often challenging to find errors in the registry or cadastre until it is digitized -- with a poorly managed registry it is difficult to cross check claims.
We argue that if a registry is in use and trusted, functioning as the public record, it should be on the best available technology. If that transition turns up records that are clearly in error or conflicting, the opportunity to address them in a systematic manner should be seized. Records can be flagged, and a process that gives all parties a chance to be heard can be started without delaying a blockchain implementation. If, however, the registry is riddled with errors, resources may be better spent cleaning it up before incorporating blockchain.
Further, beyond the data in a registry, the processes governing it may merit revision. If a registry is low on the World Bank Doing Business Report there is a good chance that these processes can be streamlined. Revisiting them in light of the capabilities of blockchain may increase the value created from the transition. For instance, many steps in the process may be in place to ensure recording of transactions and consent of all parties. Since a blockchain will record every transaction automatically and multisig (see below) could ensure consent, these steps may no longer be necessary.
In other cases, there will be no existing registry to transfer because it has been destroyed. Haiti and the Philippines are examples of places which suffered considerable damage due to natural disasters. Not only was the registry lost but there was loss of life and changes to the built environment. In these cases, physical surveying, census taking, auditing of existing land claims, gathering of any available documentation, and major reconstruction are all required. In these circumstances, a registry is critically important from the start. Putting a city, state or island back together happens one home (or parcel) at a time. As a society is built, so is the registry.
In the wake of tragedies stemming from natural disasters, civil unrest, or military conflict, a blockchain registry is advantageous. Such a solution protects records from future disasters by recording the information on a distributed platform that is effectively immune from physical destruction. This assumes that there are multiple nodes on multiple servers in various locations and environments, which is a standard feature of blockchains. ChromaWay, for instance, uses a Byzantine Fault Tolerance algorithm that can tolerate the failure of just under a third of the nodes without disrupting the network provided a minimum of 4 nodes remain active.
2) Registries must be digitized (at least going forward)
You can’t hash a paper document. The benefit of hashing is that even the slightest change to a digital file will produce a different hash, and hashing for blockchain only works if everyone has the same file format. You can scan a document and then hash that scan, but any subsequent scan would have a different hash due to minute differences. Everyone would need the same copy in the same format in order for the hashes to agree. A hashcode could theoretically be affixed to a paper document, but that does not prevent subsequent alterations because that hash will not change if the document is tampered with. Our position then, is that there is no advantage to hashing a document until it has been digitized. And it is the hashing of documents that empowers blockchain to mitigate against the alteration of records. So we recommend that a registry should be completely digital before blockchain is added. Note that both Sweden and Georgia had fully digitized systems before incorporating blockchain.
In many cases, though, registries are reliant on centuries-old, paper documents. Optical character recognition (OCR) is well established, but scanning a crumbling piece of paper with faded, handwritten cursive necessitates human involvement. Digitizing a registry’s information is labor-intensive and can take years, if not decades, to complete, even in tech-savvy places like Canada. So how do these paper-based registries incorporate blockchain?
The most practical option is to add a token for each property with the current title holder as of a certain date. New liens or ownership claims can be recorded on the blockchain going forward. Title searches and insurance (in the US) may be necessary for an interim period as the new system transitions. Additional security could be created by digitizing and hashing previous title records to the blockchain to show history without having to store a full record.
Whether or not a registry has a fully digitized history, it needs to be digital when blockchain is incorporated.
3) An identity solution needs to be in place before blockchain is integrated into a registry.
Registries tell us who has what rights to which asset, so certainty that “the who” is valid is critical. Land and buildings can be tied to a registry via maps, deeds and surveys. Those documents can be connected to the chain via hashes, but how to validate identity? (blockchain and identity is a significant topic and we suggest reviewing the relevant section of Michael Pisa’s recent paper Blockchain and Economic Development: Hype vs. Reality for a good overview of the topic.)
At the moment, we are only aware of one blockchain-based national ID system, SecureKey in Canada, but that is only launching this year. Certainly, with Ukraine and Dubai’s stated intention of having their entire government on chain, they must also be working on something.
Luckily, we are not calling for a blockchain based identity system here, simply a digital identity system that a blockchain enabled land registry could leverage. In the Swedish pilot, for example, the large telecom company Telia provided the digital keys to verify identity. In India, the Aadhaar identity platform could be leveraged. Estonia also has a robust system (claims that it is blockchain based, however, are “fake news”). In the US, you could imagine Login.gov, the Social Security Administration or a state’s DMV providing verification of identity to a registry.
We recommend that the registry use an existing, validated identity system instead of creating a new one just for the registry. This is both because identity management is a separate skill set and because using an established system or systems (if a federated identity verification approach was taken) should result in higher quality information. Noel Taylor points out that while “verification of identity is certainly a paramount requirement for the system to work, imposing a digital ID requirement on all who transact in the system will impede progress into developing countries if equality is not addressed.” We agree, but insist that digital identity must solved first. SDG 16.9 aims to provide everyone with a legal identity by 2030. We hope this goal is met because it will get us closer to more people having property rights.
4) Multisig Wallets are strongly recommended
Having addressed identity, we turn to the security questions that plague both blockchain and real asset discussions: What happens if someone steals your key? What if you lose your key? What if someone holds a gun to your head and makes you give them title to your house with a click of a button? The public-private encryption keys built into blockchain ensure that only those holding the associated keys can register or transfer a property. But if keys are lost or stolen, there must be recourse to recover the property associated with them. We address the subject of legal recourse in the next prerequisite (5.a), but one potential technical solution is multisig wallets. Multisig requires verification by multiple signatures or keys before a transaction is completed. Instead of a seller simply pressing a “sell” button, a registry configuration could require both a seller and a banker (or registrar) to sign off on the transaction.
Some have suggested that a notary should be used as a second signer, but we do not agree. There is no reason to shackle blockchain to an outdated system that is already in decline. Notaries are part of the system of middlemen and gatekeepers that blockchain is meant to help sweep away. Other stakeholders --bankers & registrars still involved who have a vested interest in valid transactions-- can act as second signers. Once identity is confirmed and all transactions are put in an immutable ledger, there is no role for a notary in a blockchain enabled process that would justify the additional cost.
Those who dream of direct, peer-to-peer exchanges of real estate and unbundled property rights may groan at the suggestion of multisig wallets, but for most homeowners that dream is more like a nightmare. Despite the recent Parity multisig hack, which was due to poor coding, other multisig wallets seem secure. We believe that multisig wallets will prevent more problems than they will cause by the modest delays associated with their use.
5) Registries should be on a private or hybrid blockchain.
(Please see the FPR article on blockchain myths if you are unfamiliar with these terms)
There is no universal format for blockchain-based registries, but they should all employ a private blockchain in some form. There are at least three good reasons for this:
a) Both the Judiciary and Registrar need the ability to adjust the ledger. On a purely public chain (BTC, ETH) all you have is a record of the transactions by two willing parties (with their keys). If fraudulent data was entered and discovered, the only recourse for correction is another transaction reversing the prior one. If a judge rules that one spouse gets the house, but the other spouse doesn’t want to transfer ownership, what happens? If someone loses their key or dies without communicating their key to another, how is ownership reallocated? What about expropriation of privately held lands for construction of public infrastructure? On a public chain, all of these questions are difficult to answer. But in a hybrid chain, where decisions are tracked on a private chain with key documents hashed to a public chain (which is what Bitfury is deploying in Georgia with Exonum) they can be addressed by granting appropriate authorities to the Registrar and Judiciary, which is critical when managing real assets. This could take the form of a special variation of a multisig where an ombudsman party has a key allowing it to overwrite or correct data. We are not sure if that exists yet, but it will have to built. It is worth noting that Accenture has made a similar observation in the context of financial services.
What happens if someone abuses these authorities? While this is a risk, one of the appeals of the blockchain is that it is a registry of all transactions. So while we advocate for exceptional authorities to issue new keys and create reversing transactions where mandated by law, we do not suggest this should be done in secret. Since all transactions will be recorded to the chain and be visible to those with access to the chain, it will be far easier to identify and correct any foul play.
It should be noted that while open data is often in the public interest, it does not follow that all data should be universally and equally accessible. Totally transparent property records, for example, could make it easier for thieves to target specific people or assets. Privacy and security concerns will require different data access tiers for members of the public, registrars, regulators, and private companies.
b. Public chains can’t handle the volume of data involved. Registries contain deeds, titles, maps, plans, etc. All of these documents must be stored somewhere. Public blockchains can not viably store such large amounts of data. Decentralized storage and transfer systems like IPFS and Swarm may solve the problem in the future, but both are still in the alpha stage of development and therefore are not ready to be entrusted with a property registry. Registries could theoretically store the documents on a regular server and post the associated hashes to a public blockchain, but if a blockchain-based record of the actual data is desired, registries will need to use a private blockchain.
c. Anonymity is not an option. Registries need to know who is registering or transferring property records. Public blockchains allow anyone with the correct keys to broadcast “valid” transactions, regardless of who or what they are. A private blockchain is needed if registries want to ensure only the correct people, not just the correct keys, are operating on the system.
Our assumption is that the local authority would issue a wallet, but another option would be to allow third party wallet/exchange providers to hold tokens on their chains as long as the wallets can be tied back to a source of identity. Here the challenge may be less technical than behavioral: will people be willing to tie accounts that hold crypto assets to an identity?
6) Digital registries require IT support, widespread connectivity, and a tech aware population
Before a registry adopts a digital platform they should consider the costs and support requirements. An initial response may be that these additional costs make a project unviable, but the strong counter argument is that a new system should eliminate a number of existing costs. We leave this argument to buyers and sellers of the products in question, preferring to enumerate the issues and remind consumers to model them carefully.
Blockchain software is complex and the hardware requirements are substantial. It is hard to imagine that a public agency would take these responsibilities in-house. This is well-understood beyond the world of registries, which is why we have seen Infrastructure and Software “as a Service” models (IaaS & SaaS) proliferate. These models allow parties to purchase servers and software on a subscription basis instead of paying up front. We are seeing the same with Blockchain as a Service (BaaS). But this change in support model has budget implications, namely that while the upfront cost goes away the recurring costs never end. The maintenance and troubleshooting costs, however, are also shifted to the vendor.
In jurisdictions where connectivity is limited or consumers are not comfortable with digital transactions, a blockchain registry may not be optimal. If the system isn’t already digitized, we suggest starting there and then revisiting blockchain later. Registry digitization alone can be difficult to achieve. Jamaica’s registry had to retrain employees and transform its office culture to make their new digital system work, and moving to a blockchain-based system will likely face similar challenges.
7) Train the professional community that interacts with the registry
In the long run, some envision the blockchain disintermediating all parties. In the near term, this is unlikely. Lawyers will still bring suits, judges will hear them and real estate agents will offer value added services to clients who would prefer expert assistance. All of these parties will need to be trained on the new system in order for it to function properly. The importance of engaging the professional communities who will interact with the blockchain early on in the transition cannot be overlooked. Andrew Hinkes reminds us that lawyers will need to understand a number of issues, including how to present records from the blockchain, how to interpret records, and how to harmonize evidence rules with output from the blockchain. And in order to do any of that, they will first need to be trained in the basic concepts of blockchain and the new capabilities and vocabulary of the system. Even with a clear picture of the technical and structural requirements for a blockchain registry, a great deal of work will remain in the form of education and capacity building.