The law-and-economics of property throws doubts on the prospects of blockchain for transacting durable high-value assets.
You are free to sell your house contractually through a deed or, perhaps, a blockchain even if it is partly owned by your spouse or there is a mortgage on it. However, both your spouse’s ownership and the mortgage would survive intact. Therefore, in fact you are not transferring the house but a mere personal claim on yourself: you become liable to deliver the house to the buyer.
This distinction helps avoid the tendency of blockchain enthusiasts to overestimate the power of private ordering and to minimize that of trusted public intermediaries. Market participants can trade personal claims easily under private ordering arrangements, but trading property rights requires a minimum of public ordering. The reason is simple: given that contracts affect the interests of third parties who are strangers to the contract, transfers require the presence of a neutral enforcer, who must be independent not only of parties to a given transaction but also of all holders of property rights on the type of asset being traded in that market. Otherwise, the market collapses because of possible hidden burdens.
This constrains the possibilities of applying blockchain to transactions in real assets, which becomes less viable the more we move along the contract-to-property (that is, personal-to-real) continuum. Observe first that, in line with the incentives of all participants, contractual parties in all property systems are free to choose their conveyancers (mainly, lawyers and notaries public), the agents active in the contractual stage of the transfer process. By contrast, third-party protection leads the law to universally restrict parties’ freedom to choose the office that records their titles or the registrar that preserves and reviews their rights, as well as the judge who presides over judicial procedures to settle property rights (quiet title suits and equivalent purging solutions).
Consequently, blockchain should find it easier to expand into notarization and data archiving than to replace centralized property registries. Lawyers and notaries used to enjoy an advantage in identifying parties and, more clearly, in ascertaining their legal capacity and serving as providers of settlement, closing and escrow services for the parties. Blockchain now enables the development of effective services to prove to other parties that you are who you say (authentication) and you have the required permissions (authorization). Likewise, with respect to settlement, trade implemented through a blockchain can now provide conditioned simultaneous enforcement by using the principle of “atomicity”, which, in essence, ensures that both parties fulfill their promises at the same time.
The potential application of blockchain to property registries is more limited because such registries safeguard the interests of third parties who are strangers to the contractual transaction. They are not standard databases or “ledgers” because the key element in registries is legal: they mainly contain not magnitudes (values) but the legal evidence prioritizing claims (under a recordation-of-deeds system) or defining rights (under registration-of-rights).
Recorders of deeds, such as those in France or the USA, merely time-stamp and archive documents containing the (aptly-named) “chain of title deeds” and are therefore closer to a simple ledger. But the date of entry at the registry holds crucial legal consequences, allowing the record to provide key judicial evidence on the priority of legal claims, therefore in fact defining who holds a property right and who holds a mere personal claim. It is understandable that the official report on the pilot project carried out in Cook County, IL, concludes that blockchain might be used for conveyancing and lodging, but retaining the existing legal framework according to which “the county government record is the only official record”, seemingly far away from unpermissioned P2P solutions.
Registers of rights (often called “title systems”), such as the German Grundbuch or the Torrens system of title by registration operating in Australia are even more explicit: they not only date and keep the documents or deeds reflecting the transactions that the contractual parties agree to, but also verify, as a necessary condition for entry into the register, that the intended transactions respect all other rightholders’ rights on the specific asset. This allows them to provide at any moment a legal “balance sheet”, directly establishing not mere claims but the rights on a specific property.
The impact of blockchain for property registries will therefore differ between these two types of register. It is conceivable that a deed recordation system might be replaceable with an automatic system of dating private contracts and preserving their contents, providing that parties to private contracts cannot manipulate these two functions once they sign their contract. However, even in that case, some public authority would still be establishing the rules of evidence: in particular, setting the value of the blockchain as a source of evidence for property adjudication. To produce property effects, all parties must be obliged to express their will through the blockchain. Moreover, this authority must trust those designing, putting in place and — to some extent — governing or at least affecting the decentralized government of the blockchain system. (The case of company registries is similar, to the extent that most of them are closer to recordation than to registration systems).
In comparison with property recordation and company registries, property registries of rights are likely to be less affected by blockchain, because registration review cannot be easily exercised by an automatic system for valuable durable assets, for which it is efficient to define multiple rights. The huge difficulties already found by minimally complex “smart” contracts at the level of pure contractual claims would be compounded for adjudicating on property transactions, which is what a registration decision in fact amounts to. It is revealing here the lack of impact that pioneer blockchain projects are having on registration. Most of them merely use the blockchain as a backup, and the ambitious Swedish White Paper in fact proposes a system of electronic conveyancing, keeping intact the active central role of the land register. Therefore, it even seems much less less revolutionary than, for instance, the Landonline system which has been working in New Zealand since 2006, in which it is lawyers who modify the register.
Moreover, for high-value property, in addition to the costs that such standardization would cause, the decentralized decision-making at the heart of blockchain faces another serious barrier, that of individuals’ reluctance to take full responsibility for their decisions. The universal nature of property requires the same rules of evidence to be applied to all property rightholders. In a hypothetical, fully-decentralized, truly P2P property system, all individuals would therefore have to grant or deny their consent to all sorts of intended transactions which might affect their rights. They would therefore become the only custodians not only of their cryptographic keys but also of the legal integrity of their rights. As in many other areas, individual freedom is purchased with individual responsibility. To the extent that not all individuals are always willing to pay such a price, centralized trusted intermediaries are likely to prevail over decentralized systems.
Based on the author’s paper “Blockchain’s Struggle to Deliver Impersonal Exchange.” Portuguese version.