 or intangible (intellectual property, patents, copyrights, branding).){kind=link}
By Riya Krishnatrya
Blockchain defined: Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding).
Why blockchain is important: Business runs on information. The faster it’s received and the more accurate it is, the better. Blockchain is ideal for delivering that information because it provides immediate, shared and completely transparent information stored on an immutable ledger that can be accessed only by permissioned network members. A blockchain network can track orders, payments, accounts, production and much more. And because members share a single view of the truth, you can see all details of a transaction end to end, giving you greater confidence, as well as new efficiencies and opportunities.
Types of blockchain networks
There are several ways to build a blockchain network. They can be public, private, permissioned or built by a consortium.
Public blockchain networks
A public blockchain is one that anyone can join and participate in, such as Bitcoin. Drawbacks might include substantial computational power required, little or no privacy for transactions, and weak security. These are important considerations for enterprise use cases of blockchain.
Private blockchain networks
A private blockchain network, similar to a public blockchain network, is a decentralized peer-to-peer network. However, one organization governs the network, controlling who is allowed to participate, execute a consensus protocol and maintain the shared ledger. Depending on the use case, this can significantly boost trust and confidence between participants. A private blockchain can be run behind a corporate firewall and even be hosted on premises.
Permissioned blockchain networks
Businesses who set up a private blockchain will generally set up a permissioned blockchain network. It is important to note that public blockchain networks can also be permissioned. This places restrictions on who is allowed to participate in the network and in what transactions. Participants need to obtain an invitation or permission to join.
Consortium blockchains
Multiple organizations can share the responsibilities of maintaining a blockchain. These pre-selected organizations determine who may submit transactions or access the data. A consortium blockchain is ideal for business when all participants need to be permissioned and have a shared responsibility for the blockchain.
Blockchain security
Risk management systems for blockchain networks
When building an enterprise blockchain application, it’s important to have a comprehensive security strategy that uses cybersecurity frameworks, assurance services and best practices to reduce risks against attacks and fraud.
Usecases of blockchain in legal industry
Smart Contracts
Currently, legal contracts are written with physical signatures, which require a significant amount of time to accomplish for a binding legal agreement. Due to the manual processing of the legal documentation, it is vulnerable to the human error.
Blockchain could bring this to an end by making the legal documentation more accessible and transparent. By creating a contract which can automatically execute based on when specific requirements are met, the cost and friction of generating and securing legal agreements are reduced.
Let’s understand how legal documents are transformed into smart contracts.
User personas involved in binding the legal documents to the blockchain
- Signing Authority – Who approves the contracts defined by a lawyer.
- Lawyers – Who handle the legal issues and create contracts.
- Parties – Individuals involved in the legal issue.
Technical components for different users in the system
Front-end technology
- Web portal/Mobile App for Lawyers
- Web portal/Mobile App for Involved Parties
- Web portal for Signing Authority
Backend Technology
- Microservices programmed using node.js
- Permissioned Blockchain Component
Here’s how smart legal contracts could be created on the blockchain
Every user, including lawyers, parties and signing authority register to the platform with government-approved identification documents and other essential information.
Lawyers sign up to the blockchain based platform with the following information
- ID proof
- Proof of Work Experience
- Company’s name if works for any legal firm
User personas which can be involved in the blockchain implementation of litigation
- A plaintiff who files a case or initiate a court action to seek a legal remedy.
- A defendant who responds to the lawsuit or is charged with a crime.
- Lawyers who support plaintiff and defendant to get the justice.
- A Jury or Judge Court who makes the verdict.
Technical Components for User Personas in the system
Front-end Technology
- Web Portal/Mobile App for plaintiff.
- Web Portal/Mobile App for Defendant.
- Web Portal for Lawyers and Judge Court.
Back-end Technology
- Permissioned Blockchain Component
- Microservices programmed using node.
Legal challenges and opportunities of blockchain technology in the real estate sector
Opportunities offered by blockchain for real estate conveyancing – Blockchain has some characteristics that might contribute to faster, more secure transactions. It is a distributed ledger that exists in all the devices connected to the network. It is cryptographically protected and organised in a chain of transactions. It is decentralised and disintermediated, in such a way that no central authority validates transactions, but rather, this is done by the other computers connected to the network that accept the transactions. It is immutable or, at least, tamper-resistant, so it is not possible to change or eliminate a block. It, therefore, provides trust and transparency, as everyone may check that a certain transaction exists and that it has not been changed, even though no central authority is involved. Within this general concept, one might find different types of blockchain, such as the private and public ones. The public ones allow any person to connect to the network, to check the information included in the blockchain and to validate transactions, whereas a private one allows only certain people to use it, and a person or an authority manages it. Private blockchains might be also distributed but not decentralised, because their governance is not open, but reserved to a specific person or authority (Preukschat, 2017). Moreover, one might also find hybrid blockchains, i.e. those ones that combine elements of both, such as a blockchain that is privately maintained but publicly accessible. Blockchains also vary depending on the validation process. A blockchain is permissionless when any user of the network can validate the transaction (e.g. mining bitcoins). On the other hand, a permissioned blockchain allows only certain users to validate the transaction. Normally, private blockchains are permissioned, and public ones permissionless. That is why, these two concepts are indistinctly used. The use of a public or a private blockchain, permissioned or permissionless, depends on the functionalities that the network wants to achieve. However, because blockchain arose as a tool to provide trust to parties that do not know each other, private blockchains could be considered less disruptive and innovative (Gabison, 2016). If a central authority controls access to the network or the mining process of a blockchain, then the functionalities of this technology are less useful, as this authority is already providing trust.
Challenges to address from a legal perspective – Taking into account the possible applications of blockchain technology in the real estate sector (e.g. validating transactions, checking other encumbrances), the question is whether blockchain is nowadays sufficiently prepared to perform the functions of notaries, land registries, real estate agents, lawyers and so on, ensuring a secure real estate transaction. There are some challenges that this technology must overcome to be considered as reliable, legal and secure as the current real estate conveyancing systems in Europe (taking into account all the differences between member states). On the one hand, there are some general problems with the blockchain protocols, not only for real estate projects but for any other sector. For example, the costs associated with smart contracts and the scalability of the network, a problem that exists with bitcoin, Ethereum and other altcoins (Preukschat, 2017). To conclude a smart contract through Ethereum, the interested party needs Gas (transaction value) and parties have to pay the stipulated fee even when the transaction is not concluded. This is also linked with the scalability of the system: the more transactions, the more rewards are given to miners to ensure that the transaction is concluded. In addition, the creation of a blockchain database that gathers all the EU real estate transactions of any kind (purchases, renting) could certainly make verification time-consuming, needing more miners and thus more fees for each transaction. Several developers and researchers are working on solving this problem, and some of them believe they have found the solution (e.g. the fee-less IOTA, a cryptocurrency for the internet of things, with the Tangle system, where no miners exist, Popov, 2018); however, for a system of real estate conveyancing, a control of these costs (e.g. with a permissioned blockchain in which a central authority regulates prices, or a proof of authority mechanism, where the administration is the validator of transactions) would be desirable, so that this not an impediment that prevents people from registering their rights. On the other hand, there are some particular challenges that have to be faced when implementing a real estate conveyancing system through a blockchain: the control of the parties’ IDs; the legality of the contract and the verification and protection of rights in rem; the registration of co-ownership, and the amendment of the ledger.
Control of the legality and effectiveness of the contract– As said above, lawyers, notaries and even land registries in some jurisdictions ensure that a given real estate transaction is concluded in accordance with the minimum legal requirements, and they inform the purchaser about previous encumbrances and rights in rem over the property. For example, in mortgage loans, they are even obliged to detect and to inform the parties about possible unfair terms, or notaries are, in most cases, responsible for monitoring transactions to prevent illegal funding activities. Blockchain, as a distributed database, can neither inform in the same way about the consequences of a certain transaction nor carry out a previous check of the legal requirements by itself. This control is currently not possible with blockchain and smart contracts, which only check the fulfilment of the pre-conditions.
Co-ownership and other rights in rem – Current projects, which focus on blockchain and the use of smart contracts, allow the owner to sell the property while this transaction is registered at the same time. This is the case of the Landmateriet in Sweden and other projects from private initiatives such as Velow.re. However, the range of rights that can created and registered in land registers is wider in practice.
Possibility of amending the blockchain – Lastly, the law usually foresees the possibility to change the owner of a property without reaching an agreement with the former one or the amendment of a certain right or property in given situations. For example, the voidance (e.g. an acquisition of a property by a minor without sufficient capacity, Art. 1301 Spanish Civil Code) or breach of a contract might entail the restitution of performances. Furthermore, in cases of declaratory actions of ownership, the ownership of a property may be challenged and thus the person who has this right changes. The same might happen in the event of illegal activities that need to be revoked, when there are operational errors or even when the physical situation of a property changes. While the blockchain is mainly irreversible, the legislation stipulates the reversibility of transactions or changes of the property.
Conclusion: A result, when designing a blockchain for EU real estate conveyancing, one should take note of the abovementioned challenges regarding its amendment, registration of coownership and other rights in rem, control of the legality of the contract and the ID of the parties. A blockchain might be permissioned or permissionless, might have different types of consensus (e.g. proof of work, proof of consensus, proof of authority), might be anonymised or linked to a certain ID, etc.
However, to provide a protocol that allows for a complete real estate transaction, which can offer at least the same guarantees for both the signatories and for third parties as current procedures.
This technology should meet the following criteria –
Permissioned blockchain controlled by public authorities: Preferably with this feature, public authorities can ensure that real estate conveyancing provides the minimum legal standards to parties. The consensus should be administered by public authorities, so the type of consensus used would be the proof of authority model, in which the public administration validates any change in the chain. The reason for this is because of the need to guarantee that all transactions are approved only when the legal requirements are met, that the costs are controlled, preventing the registration from becoming economically impossible for low-income citizen, and also to check the legality of the contract and possible unfair terms. In addition, these authorities should have the option of amending the chain in certain circumstances, when a court requires them to do so. Thus, every country may decide to create an official blockchain controlled by public authorities or to recognise, for housing transactions, only those blockchains that meet some requirements, e.g. the ones that control prices, unfair terms, etc. The blockchain should be linked to an official digital ID, allowing the transaction only with legitimate access. Otherwise, for example, underaged persons could ask for a mortgage or sell a house without having the legal capacity to do so, something that could increase litigation.
Krishnatrya is a 5th year law student of Banasthali University
Case laws:
- INTERNET AND MOBILE ASSOCIATION OF INDIA Versus RESERVE BANK OF INDIA. (December 12, 2019).
- Ferid Allani versus Union of India and others (December 12, 2019).
- Amitabha Dasgupta versus United Bank of India (February 19, 2021).