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Despite lingering questions, blockchain’s promises are too good to ignore

Business Law

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Although a multitude of legal concerns and questions must be addressed—and ultimately resolved—before blockchain can give rise to a new virtual reality in real estate, the promises that blockchain holds are too great to ignore. From the dawn of time, real property has been considered man’s most valuable earthly asset; and from the days of the Norman Conquest of 1066, the law relating to transactional real estate has remained virtually unchanged. Until now, possibly.

With the advent of the blockchain and distributed ledger technology (DLT) behind it, the archaic world of real property may be facing a complete and virtual overhaul, changing dramatically the way property is bought, sold, financed and leased; and how these transactions are memorialized, recorded and effectuated.

While blockchain die-hards seem eagerly poised for the demise of the role of “middlemen” such as attorneys, brokers, title agents and even the various county clerks within this realm, the technological and legal reality necessary for this to come to pass seems still quite a bit far off. With that said, blockchain is nonetheless a disruptive technology that practitioners in the area of real estate can ill afford to ignore.

In fact, use of DLT technology is already under way in places such as New York City, where a $30 million wholly tokenized transaction was concluded late this past year. In addition, some of the City’s largest, and oldest, landlords are turning to the blockchain not only to store, retrieve and share building data, but also to effectuate their leases via the implementation of “smart contracts.”

From a rudimentary standpoint, the blockchain is a digitized, decentralized, distributed ledger that immutably records and allows users to share and view information and data in real time. While blockchain is better known as the platform that enables Bitcoin and other crypto-currency transactions, its applications are much more expansive, and its utility with respect to real estate transactions unmistakable.

As mentioned above, this past year saw the closing of the first tokenized transaction in New York City. The subject premises known as 436 & 442 East 13th Street, in the East Village, represents the first such property to be tokenized on the blockchain; and I suspect many more will follow. In such transactions, each token represents a fraction of the full-market value of the premises. These fractionalized interests allow unprecedented access for smaller investors to invest in large, generally more lucrative projects.

In addition, several companies have already instituted DLT-driven platforms for buying, selling and leasing real estate. Such platforms allow prospective buyers, sellers, lenders and lessees real-time access to property data and information, greatly cutting down on the time necessary to conclude due diligence. Still further, it is envisioned that applications will come to fruition allowing parties to almost immediately bind up a deal via a “smart contract” with the swipe of a finger.

Smart contracts are basically self-executing computer algorithms intended to digitally execute, perform and enforce a contract. Transactions set in motion via smart contracts are meant to be readily trackable in real time and irreversible. While buying and selling property via a smart contract will certainly serve to, inter alia, cut down on the time and effort involved in entering into a binding contract, landlords with many tenants to keep track of should see the biggest benefit to their bottom line as each “smart lease” would be, in theory, self-executing, allowing real-time payments and tracking while cutting down drastically the cost traditionally associated with doing so.

Apart from the foregoing, it is envisioned that mortgages and deeds will also eventually find their way onto the blockchain, cutting down on overhead for lenders and county clerk operations alike. In fact, a company named Velox.RE, in a pilot program with Cook County (Illinois), established the first-ever blockchain-based legal deed recordation software and protocol.

Furthermore, the utility of blockchain-recorded property records will be especially evident to anyone who has represented either a lender or borrower in connection with a CEMA (consolidation extension and modification agreement). This process can be quite costly and time-consuming, especially if there are multiple mortgages to be assigned.

Add to this the fact that a missing assignment or two is not out of the ordinary, and the process can turn not only more difficult and time-consuming, but ultimately may end up being cost-prohibitive, thus denying the borrower the opportunity to tax advantages of otherwise-available Real Property Tax Law credits towards the mortgage tax. Although the adoption of the MERS (Mortgage Electronic Registration System) many years ago was meant to cure this problem, it has not worked out at all for a myriad of reasons. Blockchain’s immutable, decentralized registry may finally prove to be the fix to the missing assignment bug, among other things.

Finally, it is also important to note that blockchain initiatives are cropping up in retail banking as well. Notably, New York-based Signature Bank has been granted permission by the New York Department of Financial Services (NYDFS) to develop a blockchain-driven real-time payment system. The project is a collaborative effort between Signature Bank and trueDigital, a crypto-currency payment platform provider. The platform is said to be able to provide more cost-effective, real-time payment solutions for the bank’s clientele by eliminating any third-party involvement.

Ultimately, while questions still remain, blockchain is poised to change the way real property transactions are conducted, giving rise to a new virtual reality in real estate making its promises really too good to ignore.

Anthony J. Gallo, a Partner in Tully Rinckey PLLC’s New York City office, focuses his practice on real estate law and bankruptcy law. In addition to his extensive background in real estate and general civil litigation, Anthony brings an added dimension of experience in entertainment law matters with a particular expertise in music industry affairs.

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