By Dawson Sanders
Real estate titles are one of the most important features of property law. When the United States adopted its current title system more than two centuries ago, it led to an economic boom that encouraged countries all over the world to adopt similar property schemes. But the United States has fallen behind. Several nations have begun using new forms of technology to improve land title management, making it easier to validate, transfer, and record property interests.
The technology comes from an unlikely source: cryptocurrency. Blockchain, the software that makes cryptocurrency possible, is a self-verifying digital ledger that offers solutions to many of the problems inherent in traditional title systems. Blockchain recordation that replaces or supplements title registries could have a profound impact on the real estate industry. Although the United States’ title system may not yet need a complete overhaul, blockchain supplementation could still be advantageous.
Until the eighteenth century, real estate ownership in the American colonies was feudal–all land was owned by the British Crown. The King of England granted land holdings to his favored lords or generals, who would then grant tenancies to settlers. Neither lord nor tenant could transfer their interest in the land because the Crown remained the true owner, possessing all the rights to the property and its profits.
Following the Revolutionary War, however, the newly formed United States government seized all American land previously held by the British. Shortly after, the Land Ordinance of 1785 established a survey system for these lands and titled them to the government, who then sold the titled, freely exchangeable lands to settlers. This system of documented, individualized, transferable property rights created a legal framework ensuring owners could take full advantage of their land’s economic value by selling it, leasing it, or developing it as they deemed fit. This structure has been a factor in the economic success of the United States ever since.
The system, however, is far from perfect. Unlike a deed, titles are not physical documents. Rather, they are an intangible group of rights assigned to the owner of a property. So, although possession of a deed is an indication of valid title, possession of a deed is not sufficient to show that the possessor is the valid titleholder.
In the U.S., a surprisingly complex process is used to determine whether someone is the valid titleholder of a property they claim to own. Receipts of a property dating back at least a few decades are traced backward in a grantee index. Then, conveyances of the property prior to the date of the search are traced forward in a grantor index. A proper search will usually reveal if there are any discrepancies in the “chain of title,” such as multiple conveyances from a single owner.
Even when done correctly, however, a thorough title search can be unreliable. Buyers or sellers may fail to record their conveyance or receipt of a property at the appropriate time or fail to record entirely. Documents can be lost or mis-recorded, and various encumbrances may be recorded separately. Moreover, interests such as adverse possessions and prescriptive easements are simply not recordable, and thus not discoverable via a title search. When a title is challenged, it can result in substantial time and expense. Parties to the conflict must engage in some form of dispute resolution and the invalid titleholder may lose an interest (or an entire property) for which they recently paid, forcing them to sue whoever sold them the property if they wish to recover the loss.
For these reasons, the U.S. title insurance industry generates around $22 billion dollars every year from property purchasers looking to mitigate their risk of paying for land without receiving appropriate title. Although they are likely to taper as the real estate market cools off due to rising interest rates, title insurance revenues have been increasing in recent years. Their trend over the last few decades indicates that significant time and money are spent alleviating the symptoms of today’s imperfect title-management system rather than cure it of its imperfections. Previously unavailable technology may now offer such a cure.
A. Blockchain: The Basics
A blockchain is a decentralized, independently verified ledger. Unlike previous forms of data storage, there is no server: no central database exists to store the information. Instead, each device connected to the blockchain serves as a node on the network, and the legitimacy of any changes made to the data is verified by other nodes based on the rules of blockchain.
The launch of Bitcoin in 2009 changed the way we think about money by proving the efficacy of a currency backed neither by a commodity nor a government. However, the underlying technology that makes cryptocurrency possible, the blockchain, has much broader applications. For example, to reduce the sale of blood diamonds passed off as conflict-free, blockchain ledgers are being used to verify the source of precious stones by tracing them from mining, to cutting, to wholesale, to retail so customers can be certain of their source. Blockchain technology may also be used as a means of customer verification by banks, increasing access to financial tools for the unbanked by “decentralizing” identity on a digital ledger.
B. Blocktitle: General Theory and Application
Blockchain might improve title verification and management. Using blockchain’s digital ledger technology, verification and transfer of real estate titles could be more efficient and reliable.
In a perfectly implemented blockchain-based land management system, or “blocktitle” system, title is verified, transferred, and recorded on the blockchain. When parties agree to transfer land rights, the agreement is executed on the blockchain and authenticated by the network’s nodes following the blockchain’s chosen authentication procedures. If dual chains of title arise, the network determines which chain is legitimate, ensuring only one valid transfer is recognized and memorialized in the ledger. Each transferred property interests becomes a “block” on the chain such that each change in ownership is traceable to the last.
Because the system is self-verifying–that is, the nodes confirm the legitimacy of the transfer–there is no need for a central authority to take part in the system’s management. Similarly, a blocktitle system eliminates the need for escrow because blockchain uses internal programming that can perform various functions upon the fulfillment of specified conditions. These “smart contracts” play the role of an objective third party and automatically hold each party to a transaction accountable for their end of the bargain.
Physical title registries can be lost, stolen, or destroyed. Traditional digitalized registries can be compromised if their host-server (the server storing all the data) is hacked or destroyed. In 2010, for example, an earthquake in Haiti left over a million people unhoused and simultaneously destroyed sixty years of land-registry archives. Thus, when the state expropriated the land following the catastrophe, the government was unable to identify or compensate the previous owners. A blockchain registry, on the other hand, is effectively immutable. Even if individual nodes in the blockchain become compromised (in the same way a server could be), all other nodes retain a copy of the legitimate ledger. Thus, if a node attempts to tamper with the ledger, the blockchain itself remains immune because the other nodes intervene to correct the data.
Perhaps most conveniently, a blocktitle system is transparent and easily searchable – there would no longer be the need for tedious research to discover whether the property is subject to any liens, easements, or covenants. Additionally, the process of ensuring a claimed seller is the valid titleholder would become redundant because only the valid titleholder may initiate a blockchain transfer of their property.
There are practical limitations that challenge blocktitle’s ideal, theoretical form. Although a blocktitle system is self-verifying, it is not self-starting. The initial entry of data requires a substantial amount of time and effort. This means the burden of implementation largely depends on the quality of the current registry.
In 2015, after receiving substantial funding from the World Bank and other international donors, the country of Honduras began working on a blockchain-based land registration. However, the majority of title for Honduran property was uncertain at the time, and as the burdens of implementation accrued and the country’s political instability drew attention away from the project, the effort was abandoned. Conversely, Sweden had a highly advanced land registry when it began experimenting with a blockchain in 2016 and successfully implemented a test-system with relative ease. Although some counties maintain digital records, the United States still largely relies on physical land registries. Digitalizing this data could require the extensive, diligent, manual entry of millions of property rights.
Further, blockchain is only as strong as its weakest link. Because a blockchain registry tracks transfers of rights, the chain of title grows as changes are made to the data within the first block (i.e., when the initial titleholder transfers his property interest to someone else). Thus, if the initial “titleholder” is not the true titleholder, the entire chain of title could be tainted. When starting from scratch, therefore, the initial transfer of data to the blockchain must be accurate, and just as the entry of information in the current system is subject to human error, so too is the entry of information into the first “link” in the blockchain.
When implementing a blockchain-adjacent title registry in 2018, for example, the Republic of Georgia already had extremely reliable data compiled by the country’s National Agency of the Public Registry. Georgia is now recognized by the World Bank as the fourth easiest country to register land in, and a later report on the project concluded that their high-quality data was critical to the success of the project. Current U.S. title data is more accurate than most, so the critical question here is the following: can the transfer of data to the blockchain can be done accurately?
If accurate data is accurately transferred to the blockchain, the final question is whether it will remain accurate. As mentioned above, the blockchain itself is virtually un-hackable. It is still possible, however, for blockchain user’s “identity” to be stolen. Each user on a blockchain maintains a cryptographic key intended to verify their authority to initiate a transfer of title. But just as a username and passcode can be stolen, so too can a user’s key be compromised if not properly kept. It should also be noted that improper maintenance can also lead to other issues, such as losing the user key altogether, giving rise to a need for AI-powered sorting. Transfers made by a fraudulent user are at risk of becoming an immutable part of the ledger if the blockchain’s verification process is not adequately tailored to address such instances.
No country currently working toward a blocktitle system, including those discussed above, have yet implemented a truly decentralized system. Therefore, in each of these countries, revising the system’s records to remedy fraud or fix inconsistencies remains in the hands of the government. Although this may be necessary while the efficacy of the system is still being tested, it does not increase security against fraud in the long run because government servers can be compromised or damaged, and large amounts of data can be tampered with or lost. In a decentralized system, on the other hand, the risk of fraud only exists at the individual level, and the risk of destruction or loss of data does not exist at all. Still, blockchain’s immutability must be considered and its implications addressed.
C. The Immutability Problem: Fraud, Dual Chains, and Unrecordable Interests
In a perfect blocktitle system, all legitimate transfers of interest are performed via blockchain and immediately recorded upon validation. Although the risk of fraud is minimal compared to the current system, it is still possible for someone to make an illegitimate transfer if they successfully impersonate a titleholder, and if the validation process fails to recognize the transfer’s illegitimacy. In a truly immutable system, therefore, the problem of remedying fraud must be considered.
Dual chains of title present a similar problem. In theory, a blocktitle system would make dual chains of title obsolete due to its transparency and chosenvalidation procedures. For example, after a blocktitle transfer is initiated but before it is legitimized on the ledger, a restriction could be placed on the title such that a second transfer could not be initiated. If the transfer is validated, only the new titleholder may make subsequent transfers. Further, each prospective buyer can easily view past transfers and discern who the current titleholder is.
During the implementation process, however, blocktitle would need to account for previously unrecorded and misrecorded transfers to resolve existing chain-of-title conflicts that have not yet been disputed. Because title data would be transferred to a blockchain from current registries, property interests not recorded on current registries would not be transferred to the blockchain. Thus, when such interests are eventually recorded on the blockchain, they will present dual-chain-of-title problems.
Presently, recording acts statutes are used to resolve dual chains of title. Because recording acts are state-specific, two otherwise identical property disputes may have different outcomes if the properties are in different states. These jurisdictional differences can be superficially accounted for within blockchain’s internal programming by encoding title-verification procedures that are dependent on the property’s address. Most jurisdictions, however, require an examination of facts undiscernible through data alone. In notice or race-notice states, for example, whether a purchaser had actual or inquiry notice of a prior sale can determine whether they are entitled to the land. Inquiry notice, for example, is based on whether a potential buyer had reason to question the ownership of a property prior to its sale– something as simple as a inspecting a home and seeing a doormat that says “Williams” despite the seller’s name being “Smith” could satisfy this test. Including the relevant rules in the blockchain’s internal coding programming is thus an insufficient solution to chain-of-title disputes. Therefore, the problem remains of how preexisting-dual-chain disputes might be resolved in an immutable system.
Moreover, because blockchain is a recording tool, it cannot account for the unrecordable. Adverse possession and prescription are means of obtaining legal rights to property without a formal transfer of interest and are not recordable. If someone obtains title to a home via adverse possession, for example, that person is a legally recognized titleholder whose ownership of the home would not appear in any transferee index. Being a valid titleholder, the adverse possessor is perfectly within their rights to sell the home. In a blocktitle system, however, only the titleholder recognized on the blockchain (in this example, the person from whom the property was adverse possessed) may transfer it. An immutable blocktitle system would thus struggle to ensure that those with unrecordable interests could exercise such property rights.
Solutions to the above problems could limit the options for blocktitle implementation in the United States. One solution is to make the registry mutable, at least temporarily, by subjecting it to government oversight. Mutability, however, undermines many of blocktitle’s benefits by centralizing recording authority, increasing the system’s cost, exposure to human error or corruption, and the possibility of a hack. Another solution is to compensate those whose property rights are effectively extinguished by the blockchain. The United States, however, recognizes the uniqueness of real estate and often prefers justice in the form of specific performance where a definite, binding, legal contract is concerned.
Therefore, to ensure an adequate remedy when a property dispute arises and a person lacking blockchain legitimacy is deemed the true titleholder, the court could issue an order directly effecting the transfer of title to the appropriate party on the blockchain. This is similar to an order for specific performance in which a court orders a party to perform a particular act, such as completing contractual duties rather than paying damages for not completing them. If property ownership is disputed and court proceedings result in a judgment favoring the party lacking blockchain legitimacy, a court-ordered blockchain transfer would ensure the valid titleholder is not deprived of any rights accompanying their legally recognized property interest. Moreover, this remedy would promote the recognition of legitimate titleholders on the blockchain, increasing the blockchain’s accuracy and decreasing future disputes.
This is only true to the extent the court is correct in its judgment, although this concern is equally relevant under the current system. A more significant problem arises in instances when an illegitimate titleholder cannot be summoned to court. The identity of a fraudulent transferee may not be ascertainable, or a previous titleholder from whom property was adverse possessed may be difficult to locate. In either of these cases, it is possible that the true titleholder is left without recourse.
Conclusion & Predictions
Although a blocktitle system does not solve every issue currently faced in land-title management, it does promise a level of transparency, accuracy, and efficiency not yet attained by systems today. In countries where preexisting data makes the implementation of blockchain-based title registries less burdensome, or where the benefit of secure titles could lead to economic development, the application of blockchain technology has already begun to prove its value. Nonetheless, an accelerated shift toward blocktitle is likely not worthwhile in this country given current limitations in application and the relative sufficiency of the United States’ title system,
As property records in the U.S. continue to be digitalized, however, the costs associated with transferring registry data to a blockchain decrease. As countries like Sweden and Georgia continue to demonstrate the advantages of applying blockchain technology to land registries, blocktitle’s potential benefits for the U.S. become clearer. Experimental programs or blockchain-compatible real estate tools are thus likely to take form in the United States, supplementing the current system and addressing some of its inefficiencies and inaccuracies. Still, a standalone blocktitle system that is immutable and is used for both the recordation and transfer of title may not be seen in the States for quite some time.
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