Barclays and RBS Have Reduced the Real Estate Transaction Process Four Times: Who Benefits?
Recently, Barclays and the Royal Bank of Scotland (RBS), with the participation of enterprise software company R3, successfully tested a blockchain project that will speed up real estate transactions.
Such a solution can provide transparent and fast operations for the end user, R3 officials say. However, is it already possible to talk about a breakthrough in the market? How will the traditional process of real estate transactions and mortgage issuance change? Why did banks, skeptical before, change their attitude toward blockchain? And what are the risks for private blockchain platforms? Experts answer.
Barclays and RBS’s solution as a response to market needs
Today, real estate transactions are carried out using paperwork — a complex, slow and sometimes expensive process. “When a person wants to purchase a house, the process encompasses a whole host of different interactions with different businesses and governmental entities that can be uncomfortable and drawn out,” John Stecher, group managing director at Barclays Investment Bank, said.
As a rule, about eight parties are involved in a real estate transaction — in addition to the buyer and the seller — each of whom must go through the process of exchanging information, including filling in a variety of documents, and using different platforms and databases. This can lead to delays in transactions, errors, increased costs and uncertainties for all parties, according to analysts from the Instant Property Network (IPN).
As a solution, Barclays and RBS proposed a system that allows participants in real estate transactions to conduct transactions directly, while maintaining control over their personal data.
During the test, which took place over five days, real estate transactions were modeled using data in a distributed registry. As a result of the experiment, it turned out that blockchain is able to simplify and optimize the process of buying and selling real estate from more than three months to less than three weeks.
For the record, this is not the first example of speeding up a commercial deal using blockchains. The first real transaction was successfully carried out by Barclays back in September 2016, in less than four hours. Blockchain was used to transfer $100,000 as a payment to ensure an export of a batch of butter and cheese produced by the Irish dairy company Ornua to Seychelles Trading Company. In comparison, this process usually takes up to 10 working days due to the processing of all the necessary documentation.
It is reported that IPN, which is the technical partner of the new project, is currently engaged in recruiting dozens of private and public companies to participate in the next phase of the project, and is planning to release a new version of the platform in September.
According to the project participants, the use of blockchain for this process can save the real estate market about $160 billion a year. Dan Salmons, director of mortgage innovations at RBS, said:
“What has made a real difference here is that R3 has brought representatives of all the key parties involved in the process together, so as a result we can see the potential for a network of this kind to improve transparency and speed for customers, and reduce cost and complexity for all involved. IPN has given us our best view yet of what a future end-to-end journey could look like.”
The project is a consortium between the American law firms Squire Patton Boggs, Ashurst and Clifford Chance, along with the real estate corporation Search Acumen. R3 CEO David Rutter commented:
“Not only has it shown that distributed applications work and the benefits are real and substantial, it has also shown that there is huge appetite in the market to evaluate it.”
Blockchain application in the real estate sector
In the real estate sector, blockchain can be used at all stages of value creation.
Registries of objects, transactions and property rights
With the help of new technology, information about real estate objects, transactions, registration of property rights, encumbrances and the state of objects can be recorded in distributed registries, access to which can be obtained using both desktop computers and mobile applications.
Pilot projects of such systems have been already started in several countries. Since early 2017, various countries — including Sweden and Brazil — have begun to use blockchain technology to facilitate the ownership of land and properties.
This suggests that every property may soon be able to get a “blockchain passport,” which records and stores the details about its technical characteristics. In particular, this will simplify and speed up the valuation of real estate, since it is now necessary to reorder the relevant documents for each transaction, which cannot always be trusted.
Such data will be better protected from forgery and manipulation. For example, in order to forge an existing entry in a distributed registry, hackers will have to hack each of the computers that stores a copy of the registry — and these numbers can be huge (as there are several million users in the same bitcoin network). One cannot delete a record or add retroactive data, which significantly reduces the scope for fraud and abuse.
In the medium term, the introduction of the use of smart contracts in the real estate sector is expected. Smart contracts, in this case, can serve as electronic protocols to register, and set the terms and rules of real estate transactions.
On Sept. 5, 2016, British consulting company Deloitte announced that, in partnership with the administration of Rotterdam and the Cambridge Innovation Center (CIC), it had launched a pilot project that aims to serve the registration of lease transactions by using blockchain.
Additionally, smart contracts can be used to track the fulfillment of the conditions or rules laid down in the system and carry out specified actions in accordance with the prompted event.
Thus, there is no need to conclude additional agreements in a written form. In addition, according to Adam Cuffe — the CEO of Blockbank, a digital decentralized commercial trading platform — the introduction of distributed registry technology at the stage of conducting commercial real estate transactions will help reduce costs not only for buyers and sellers, but also for other participants of the process (e.g., banks):
“The distributed registry technology will be in demand in almost all real estate transactions, including the transfer of money, the registration of property rights and the conclusion of contracts. I believe we will see adoption in key processes and institutions of this industry over the next decade. And banks, being profit-oriented, are the first who are interested in using such solutions.”
Cuffe also added that the further development of artificial intelligence (AI) technology will additionally reduce the human element:
“If you look at a local bank now and ten years ago, you will see the changes. The systems that integrate and further improve information transmission, payment messaging as well as referencing will further reduce operational costs. These institutions will have the leading edge as we transition into the blockchain banking era.”
Notably, blockchain has already demonstrated its potential to replace routine paperwork in real estate. For instance, Hong Kong real estate operator New World Development and the Hong Kong Institute of Applied Science and Technology (ASTRI) are working on a platform similar to the one being created by Barclays and RBS. On Feb. 20, one of the largest state-owned Chinese banks, the Bank of China, became a project partner, as reported by Cointelegraph.
In the long run, blockchain can increase market transparency and resolve issues related to the relationship between the principal and the agent. In particular, we are talking about escrow accounts, which are often used when buying or renting real estate. For example, landlords in the United States take an insurance deposit from the tenant, which is kept in an escrow account, from which money cannot be withdrawn without the latter’s consent.
Today, escrow holders are mostly banks and notaries, but distributed registries can change the situation. For example, when buying property at the construction stage, the buyer will be able to deposit money into an escrow account in a smart contract. After the new building is put into operation and the buyer acquires the right of ownership, the money is automatically unlocked for the developer using a smart contract.
In apartment buildings, decisions on common infrastructure — for example, major repairs or landscaping of the local area — are often made through a vote among apartment owners. Distributed ledger technology may also ensure reliable remote voting, when every owner can make sure that each vote is counted correctly. According to Cuffe:
“Blockchains can be in demand in other cases when decisions in the real estate industry are made on the basis of a vote, for example, for voting by shareholders or shareholders.”
These factors can also stimulate the development of collective investments. Smart contracts offer virtually unlimited possibilities for structuring rights to objects and investment projects, and this may help to construct various crowdfunding formats.
Purchase of real estate for cryptocurrency
In the short term, blockchain can be used to transfer the price of real estate transactions using established cryptocurrencies, as well as through an initial coin offering (ICO). The market has already seen the first such experiments.
For example, in 2014, bitcoin was used to sell homes in Bali and Kansas, each worth more than $500,000, and a house in California for $1.6 million. In the near future, blockchain can be used not only to pay for transactions in cryptocurrency, but also to transfer fiat and national digital currencies issued by state central banks.
Construction data storage and analytics
Blockchain can go beyond aiding in the purchase of real estate and be used at the construction stage, as claimed by Mike Davie, CEO of Quadrant, a blockchain-powered big data platform that maps and authenticates data:
“Location data plays a vital role in the design, placement and construction of a building – residential or commercial. Developers need to understand movements of people and travel patterns before making what is often a billion-dollar decision on the construction of a new building. If the location data is inaccurate, the negative consequences can last for many years.”
Davie also added that another noncommercial application of blockchain in the real estate market industry can be connected with data storage and analytics:
“When buildings are built, analysts will also use and study location data for investor purposes, such as foot traffic, customer demographics, catchment areas, which in turn influences everything from rental prices to real estate investment trust (REIT) values. Additionally, decentralised data marketplaces can make data more available and accessible to retail investors, helping them select their property which is often a once in a lifetime investment.”
In addition to such advantages as reducing the costs of business processes, increasing the level of transparency and ensuring the reliability of the documentation process, some questions regarding the practical implementation of such solutions remain. Due to the complexity of this technology, many companies cannot solve the problem of its development and implementation — in particular, because of the need to use, as a rule, large computing power and because of the associated energy consumption. In addition, regulatory issues that still make it difficult to use blockchain also remain unresolved.
Users themselves also shared similar doubts. Some of them negatively commented on the successful trial of solutions from RBS and Barclays. Some called this news another event that “lasts forever” and brought a whole list of similar statements made by large organizations since 2015.
Others said that it is possible to speed up the process of real estate transactions without using blockchain:
I can do even faster using “internet technology” and “software technology”
— Sebastien Meunier (@sbmeunier) April 5, 2019
Maria Bellmas, institutional deputy director for trade and product supply at ANZ — one of Australia’s Big Four banks — said:
“Blockchain has been the darling of the tech world for some time and increasingly so over the medium term, perhaps in part pushed by scorned crypto fanatics grasping for some justification of their obsession in the wake of the bitcoin collapse.”
According to her, one of the main problems is that well-established financial institutions do not need blockchain technologies to improve their proposals, because the existing databases and technological solutions have checked themselves and are justified.
“The reality is a lot of the problems blockchain projects attempt to fix have already been solved by existing technologies. In many cases, a regular database can solve for the problem with more reliability and for much less cost than blockchain.”
Banks changed anger to mercy
Notably, until recently, banks were wary of conducting specific experiments, limiting themselves only to abstract statements that cryptocurrencies would not compete with traditional currencies and that blockchain is a rather young technology.
But this “denying strategy” failed with increasing popularity and the prices of cryptocurrencies in 2017. States then began to create regulatory bills, and banks began to glance in the direction of blockchain.
On April 26, 2018, JPMorgan Chase, the largest U.S. holding, patented a blockchain-based peer-to-peer payment network, which can be used for intrabank and interbank settlements. The patent application proposes using a distributed registry to process payments in real time, without having to rely on a third party to store a “control” copy of the information.
Earlier, the JPMorgan team expressed a negative attitude toward blockchain and cryptocurrency. In 2017, the head of the company, Jamie Dimon, made numerous negative statements about bitcoin, calling it “a fraud” and saying that it’s “worse than Tulip Mania” and only for “drug dealers.”
BREAKING: JPMorgan CEO Jamie Dimon says bitcoin “is a fraud” that will eventually blow up https://t.co/ZnbSx16LT9
— CNBC (@CNBC) September 12, 2017
Dimon also threatened to dismiss his employees if he caught them using Bitcoin.
Later, the head of the holding relented and apologized publicly for his rude expressions addressed to bitcoin. He even hinted that the blockchain technology itself is not so evil and, on the whole, he is sympathetic to it.
Soon, JPMorgan Chase patented the use of blockchain to settle transactions between banks, which allowed it to significantly reduce the number of intermediaries necessary to verify international payments. The solution was based on Ethereum.
In the meantime, those who believe in a global banking conspiracy said that Dimon was speaking not at all spontaneously, but purposefully, thus influencing the price of bitcoin. Notably, the critical statements might have caused the leading cryptocurrency’s price to drop by as much as 8 percent.
“I think crypto-currency is junk….The idea of an anonymized currency produced by people who have to mine it, the value of which can fluctuate wildly — that to me is not the way that any medium of exchange deserves to be considered as a medium of exchange.”
Nevertheless, as of September 2018, the payment leader filed as many as 80 applications for patents related to blockchain. In particular, MasterCard promises to develop its own distributed server with a user base. It is assumed that the profile of each user will contain information for identification, as well as some secret data. At the time of the creation of a new transaction, the server will issue two hash values: The first is related to the details of the operation, the second to the secret profile data. Only the second value will be sent to the distributed database. This approach will preserve the transaction’s anonymity.
How Barclays froze the project earlier
Since 2016, the mood regarding cryptocurrency and blockchain continually changed in the headquarters of Barclays as well. In September 2016, the bank conducted the first transaction through blockchain. It was a $100,000 deal between the dairy company Ornua and the reseller Seychelles Trading Company.
In August 2017, the former leader of the bank, Antony Jenkins, stated that for large bank players, blockchain technology could become a real threat:
“This is just in the footprints of what’s going to happen here. As these technologies season and develop, we can imagine total transformation of the banking system, using Blockchain for example, in a world where banks don’t really exist anymore.”
A year later, the new CEO, Jes Staley, assembled a team to explore the possibility of launching its own trading platform for digital money. However, on May 1, 2018, the bank management decided to freeze the initiative.
The project was intended to determine the prospects for cryptocurrency and find out how interesting they are to the customers of one of the largest banks in the United Kingdom. Also, experts studied what type of IT infrastructure is required to work with digital money.
Why did the company decide to move forward after being skeptical? It took banks some time to thoroughly examine the benefits that blockchain can offer, according to Nick Spanos, CEO of Bapple Realty in SoHo, New York City, and founder of Bitcoin Center NYC:
“Now, they’ll begin to offer services to the public that use blockchain. But they’ll want to limit this phenomenon solely to try and continue to steer customers and clients to their traditional financial services.”
Dan Salmons, director for mortgage innovation at RBS, announced that the solution that could be beneficial for an end customer appeared only now:
“We are near the end of the hype cycle and have not found a great consumer solution for distributed ledger technology until now. Property is an industry that is ripe for this, where a complex difficult process for customers could be made cheaper and more transparent.”
A look at the future
Such a rapid turnaround in banks’ initiative to use blockchain can become a threat to blockchain projects that develop real estate solutions. However, according to Spanos, blockchain startups have nothing to worry about:
“They [banks and blockchain projects] will be complementary to each other, though in the long run people and firms will gravitate more toward the blockchain firms. The blockchain firms are starting out from a perspective of how to decentralize access to liquidity and to facilitate a more popular participation in real estate markets and development projects. While banks are using it to streamline internal processes, they’re unlikely to as quickly or as fully begin eroding their own legacy, outmoded profit models.”
In addition, he believes that such cooperation will accelerate the development of new solutions and will be beneficial, both to developers and buyers:
“There will be better rates for developers and lower entry barriers to build bigger projects, and for less. There’ll be easier paths for rent to own, and for people to have ownership in the properties and building complexes they actually live in — they can have ownership of the complex, and it can be partly awarded for cleanliness and on-time payments. Properties with higher capitalization rates in more desirable areas will be more appealing with lower barriers, increasing the potential for revitalizing depressed areas.”
In general, the potential of smart contracts in the commercial real estate sector is assessed positively. Even being partially integrated, blockchain will be able to assume such functions as the preparation of rental and sale contracts, the storage and analysis of the necessary data for real estate valuation, the monitoring of the performance of duties by service providers and other functions. Nikolaos Kostopoulos, a European Union regulation researcher, said to Cointelegraph:
“Investigating further the potential outcomes from the widespread popularity of cryptocurrencies in combination with the vertical adoption of blockchain within the supply chain of the real estate industry predicts a whole world of new opportunities for the real estate market: from fractional tokenized ownership of properties to futuristic startup societies with decentralized governance.”
He also added that Europe already witnesses applications simplifying the facilitation of peer-to-peer loans with properties as collateral, and that they outperform financial products:
“It’s only a matter of time to see properties to be offered to a multi-ownership format which will become a reality with real estate e-registrests on the blockchain than paper contracts.”
The experience of Barclays, RBS and R3 could become a demonstration in this case. As stated by Todd McDonald, co-founder and chief product officer at R3, in the near future, the company plans to digitize records of real estate in England and Wales. And in September 2019, according to company forecasts, users will already be able to see the new version of the platform.