Blockchain is a perfect fit for real estate contracts. How so? Just imagine you’re signing a home purchase contract. You, like the other parties in the deal, have your copy of a smart contract. Not a third party — you.
The contract’s terms and contingencies are entered as code in a blockchain network. Once a contingency is met, all parties get notified, approve the update, and move the process smoothly along.
As the transaction closes, the deed goes onto the blockchain — rather than having to be executed on paper and registered at the county clerk’s office.
S&P Global Weighs In on Smart Contracts, Approvingly
S&P Global Inc. assesses stocks, bonds, exchange-traded funds, and commodities. It’s considered the largest of the top rating agencies. Here’s what S&P Global said in October 2022 about blockchain-based smart contracts:
Using smart contracts in financial transactions can improve efficiency and reduce reliance on third parties like asset servicers and custodians, as well as make transaction resolutions faster…
S&P Global adds that any activities related to the agreement would be time-stamped and transparent. That would make fraud hard to carry out.
The continual challenge of tracking people down for updates and permissions would be solved. Borrowers and lenders, insurers and regulators would all be able to see where the transaction stands in real time. The smart contract can even channel funds as agreed when a specific action happens.
As a case in point, S&P Global notes Sweden’s successful application of blockchain deed recording.
How Did Sweden’s Land Registry Use Blockchain?
In 2018, developers in Sweden working with Lantmäteriet, the Swedish land registry, first used blockchain to record a real estate transfer.
Several public agencies and private-sector firms helped, including a blockchain company named Chromaway. The idea? Improve real estate transactions by using smart contracts, slashing the time it takes to sign agreements, sell real estate, and record conveyances in Sweden.
The issue is this. Sweden’s laws would have to change if blockchain land records are to become a normal business practice. So the government set up a special committee to work on it.
A major challenge for regulators is the essence of blockchain itself. Its technology puts customers in charge of their own transactions. This is why the contract has to be perfectly coded and the parties must all be crystal clear on what each of their entries will do.
The Challenges Are Worth Overcoming
At its best, a smart contract will avert the usual risks (most significantly, deed fraud) that we see with today’s standard deed recording system. There will be much less dependence on human actions — although regulators will play key roles. Smart contracts can also make negotiations more transparent, to help the parties understand each other’s actions and prevent legal disputes. According to S&P Global, this “could enhance the creditworthiness and the integrity of transactions.”
Smart contracts could be powerful consumer protection tools, as their coding can make legal compliance necessary for them to work. They could clearly show each party’s rights and duties under the controlling law.
Still, the firm strongly emphasizes the need for auditing and quality control. Specifically, S&P Global posits:
Parties may need to rely on a programming expert to transfer the agreement into code or ascertain that third-party code is a reliable representation of the agreement.
Smart contracts, S&P Global observes, are still in the early days of development. Ultimately, smart contract technology could add real value to the world of real estate agreements and document recording systems. This story continues.
Will Blockchain Burst Through the Bottlenecks?
What’s holding up blockchain for U.S. state governments and federal agencies is also what’s holding up formal adoption internationally. S&P Global says more service providers who can offer proven backup systems are critical to progress.
So far, regulatory approaches to blockchain and smart contracts vary widely. Yet as the U.S. government has recently indicated, blockchain tech will receive support in its evolution toward formal adoption.
Ashish Sinha et al. for S&P Global: Smart Contracts Could Improve Efficiency and Transparency in Financial Transactions (Oct. 4, 2022).
European Commission’s EU Blockchain Observatory and Forum: EU Blockchain Ecosystem Developments (Sep. 9, 2022).
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