Permissionless Real Estate Title Transfers on the Bitcoin Blockchain in the USA! — Cook County Blockchain Pilot Program Report
- Can you legally transfer ownership of real estate on the bitcoin blockchain?
- Can a blockchain real estate title transfer be recorded in the government public records?
- Can you do both without needing special permission or partnership with the county government?
The answers are yes, yes, and yes.
I know this because my startup velox.RE, recently completed an eight month pilot program with Chicago’s Cook County Recorder of Deeds to test transferring ownership of real estate on THE blockchain and subsequent recording of that conveyance into the public record.
If you prefer to watch rather than read, I briefly summarize the pilot program in this video.
The pilot program was a collaborative, volunteer effort, with talented individuals and organizations who represented public and private stakeholders. Besides velox.RE, these participants included:
- Lewis Cohen, a partner at international law firm Hogan Lovells
- Chuck Thompson, Founder of Blockchain Consulting and legal advisor to velox.RE
- Leaders from The International Blockchain Real Estate Association (IBREA)
- Cook County Recorder of Deeds (CCRD)
- Two Chicago-based pro bono counsel from law firm Goldberg Kohn represented CCRD
- Others from title insurance, notaries public, and technology lent their expertise for specific issues
After months of research, discussion, and software versions, the pilot program produced the following accomplishments:
A) velox.RE successfully completed several tests of a Bitcoin blockchain real estate conveyance with a Chicago property owner. This met the all the legal, procedural, and software requirements agreed upon by the pilot program participants.
While a company reported that it created a token to stand for real estate and sent it to another in 2016, the velox.RE pilot program will allow velox.RE to perform the first known legal and paperless conveyance, where the actual exchange of a token was done in a manner that the grantor and grantee expect to qualify as a legal conveyance. Furthermore, velox.RE, and others who follow can perform blockchain conveyances in all 50 US states.
B) Cook County Recorder of Deeds approved the legal instrument that velox.RE and its user — property owner could use to publicly record a blockchain conveyance.
The pilot program produced the following conclusions:
- Property owners can transfer title to their real estate with Bitcoin colored coins right now. (Permission or participation from a Recorder’s Office is not needed since they aren’t involved in property conveyances). For the blockchain conveyance to be legally valid, it must follow existing legal requirements and certain technological specifications.
- Property owners can record their blockchain conveyance into the public record right now. Indeed, as long as the document is properly formatted, the Recorder’s Office must, by law, record it.
How is this different from other blockchain pilot programs?
There are two other notable blockchain real estate pilot programs, one in the Republic of Georgia and one in Sweden. Both have respected teams and have accomplished their goals to date. Georgia and Sweden use a title registry system, where a property changes ownership by a government official updating the land ledger to reflect the new owner. The government performs the conveyance between the parties.
In contrast, (most of) the US uses the deed registration system where the seller transfers ownership of the property directly to the buyer using a deed. In a separate, optional step, the buyer may choose to publish this deed in a county clerk / recorder’s office.
How do the Swedish and Republic of Georgia pilot programs differ from ours?
Technology. Both European programs used a private blockchain. We used the Bitcoin blockchain.
Function. The Republic of Georgia’s program was a land registry. Property did not change ownership on a blockchain. But rather, existing records were “backed up” on a blockchain. The Swedish program focused on using a smart contract to make a more seamless transactional process. In both cases the government ran some sort of blockchain technology.
The function of our pilot program was to transfer ownership of a property peer to peer, (between buyer and seller). We tested using a blockchain deed to replace a paper deed. We also tested how a blockchain conveyance could then be recorded into the public government record. In both cases, the government did not run any blockchain software, but rather helped craft the legal and procedural steps.
Why did we use Bitcoin (blockchain) specifically?
Bitcoin is the most secure and robust decentralized value transfer network. It has been running for eight years with no downtime, has more processing power dedicated to it than the largest supercomputer in the world and has a simple scripting language with the smallest attack vector. Other blockchains like Ethereum are interesting experiments, but they do not match Bitcoin in terms of reliability, security and decentralization. Financial institutions that value reliability, security and decentralization for digital assets are likely going to want solutions on top of Bitcoin.
— Adam Back, Inventor of Hashcash & CEO of Blockstream. Source
Why Use Blockchain For This?
What problem were we trying to solve with using the blockchain? Primarily fraud, asset liquidity, and transactional costs and friction.
The real estate industry faces multiple pain points caused by fragmentation and centralization. Technology is fragmented across different protocols. People are fragmented across different roles. Technology is centralized in proprietary and non-interoperable software applications. Data is centralized by third parties. In the upcoming velox.RE white paper I go into exhaustive detail on our technology and why it solves the major problems in real estate.
This fragmentation and centralization produces the following ten pain points:
- Illiquid assets / cumbersome title transfer
- Slow price discovery
- Expensive Due diligence
- Incomplete and insecure property data
- High transaction costs
- Unnecessary third parties
- Non-interoperable and proprietary software
- Legal inconsistencies
- Haphazard mortgage tracking
The Cook County Recorder of Deeds (CCRD) faces a lot of fraud. In explaining their “Deed Check” service, the CCRD website says,
Even though the deed was conveyed to you when you purchased the home, and was likely warranted to be free and clear of outstanding liens or claims at that time, there is nothing to prevent a scammer from filing a false claim on top of your legitimate deed after closing and finalization of the conveyance.
This is because County Recorders are not authorized by law to verify the legal claims made in documents.
The FBI has called mortgage fraud one of the fastest growing white collar crimes. In the US, deeds are filed in county recorders offices, who cannot police fraudulent documents.
County recorders are required to record any document that meets legal standards. We are not authorized by law to verify the legal claims made in documents. Unlike a credit report, property owners cannot “Freeze” their chain of title to prevent someone from recording a lien or document against a property. Most fraudulent recordings happen as an abuse of our open recording system.
— Karen Yarbrough, Cook County Recorder of Deeds, Source
Fraud isn’t limited to submitting false documents to the recorder’s office. Even in the US, government fraud still occurs. For example, on January 20, 2016 a clerk in Chicago’s Cook County plead guilty to accepting a cash bribe in exchange for preparing a back-dated deed on an Oak Park home and agreeing to record it with her office.
The Blockchain Deed
velox.RE digitizes real estate assets by creating a Bitcoin token (colored coin) to represent the asset. To transfer the asset you transfer the colored coin on the Bitcoin network. The Bitcoin blockchain is a public ledger of the transfer. The colored coin functions as a digital deed.
In property law, a title is a bundle of rights in a piece of property in which a party may own either a legal interest or equitable interest. The rights in the bundle may be separated and held by different parties. It may also refer to a formal document, such as a deed, that serves as evidence of ownership.” -Wikipedia
To illustrate how colored coins function as a deed in the US, I will summarize the conveyance process. It’s crucial to remember that transferring title involves two separate steps in this system.
Step 1: Conveyance
In the United States, a deed conveys (Transfers) the title to real estate. The government does not participate in the transfer, it is performed directly between the seller and buyer. And no third party is required to create the deed. The property is transferred when the seller signs the deed and hands it or sends it to the buyer.
In the example below, Glenn Tuan sold a property in San Jose, California to Shahmirzad Properties, LLC.
Paper deeds are easy to counterfeit using Photoshop. By creating a deed to a property they don’t own, fraudsters can:
- Take out a loan
- Sell, transfer, or rent the property
Paper currency is difficult, though not impossible, to counterfeit, so printing a deed on a dollar instead of a regular paper could reduce fraud. Hypothetically, the most effective way for governments to reduce fraud right now is to print deeds on their currency.
But it’s illegal to deface fiat currency. One can, however, put a deed onto cryptocurrency, in our case, bitcoin. This is basically what Colored Coin does. But instead of a paper dollar bill, title information is put onto a fraction of a bitcoin.
Making a digital currency uncounterfeitable was one of Satoshi Nakamoto’s biggest breakthroughs in creating bitcoin. Thus using bitcoin as the conveyancing medium instead of paper vastly reduces the ability to create fraudulent paper deeds.
The colored coin is the deed. It is a Bitcoin token that digitally represents the title to the property. To transfer ownership of the property, the seller sends the colored coin from her bitcoin wallet to the property buyer’s bitcoin wallet via a bitcoin transaction.
Step 2: Public Record
Going back to our example, once Shahmirzad LLC has the deed, it owns whatever title to the property was conveyed in that deed.
To protect the grantee’s interest in the property, it is common practice (but not required by law in most states) to put the deed into the government public record. This is performed at the county recorder’s office and is known as “recording” the deed. In some counties, the deed can be submitted electronically for recordation.
Shahmirzad LLC will record the deed to protect his interest in the property by, for example, preventing Tuan from claiming that he still owns the property and selling the property twice. If Shahmirzad LLC delayed a week in recording the deed, and during that period Tuan made another transfer of the same property to someone else (call them “BFP”) who did not have knowledge that Shahmirzad LLC had previously purchased the property, and BFP recorded the deed before Shahmirzad LLC, BFP would have superior rights to Shahmirzad LLC, even though it is the actual title holder.
Before buying a property, a purchaser checks the public record to verify that the person selling the property is the last recorded owner and that there are no gaps (“breaks”) in the history. The history of all transfers of a property from one owner to the next is known as the “chain of title”.
In this real estate system, the conveyance and recording are two separate steps, performed at different times, with different entities, and different technologies. With Bitcoin however, the two steps are combined into one step, occur at the same time, with the same entities, and same technology. The ownership change is automatically, immutably recorded on a public record — the Bitcoin blockchain.
The advantage given by using the blockchain as the backbone for such asset manipulation is that one can rely on the blockchain’s transparency, immutability, ease of transfer and non-counterfeitability to transfer and trade such digital tokens with unprecedented security and ease.
While originally designed to be a currency, Bitcoin supports a limited scripting language that can be used to store metadata on the blockchain. Colored Coins is a concept that allows attaching metadata to Bitcoin transactions and leveraging the Bitcoin infrastructure for issuing and trading immutable digital assets that can represent real world value. The value of such digital assets is tied to a real-world promise by the asset issuers that they are willing to redeem those digital tokens for something of value in the real world.
The full text and data about the asset (such as address and name of owner) are not contained in the bitcoin transaction. There isn’t enough storage space. Instead, all of the information is kept off chain, in the data storage system of Colored Coin. This data is hashed and the resulting hash value is stored as metadata in the OP_RETURN field of the bitcoin transaction.
Let’s return to the pilot program and how we adopted our technology to fit the legal requirements for a property conveyance.
Making Paper Deeds Digital
We had five attorneys from four different law firms, several government officials, two title insurance company presidents plus other real estate professionals, research, discuss, and test how to make a blockchain deed conform to existing laws. After more than half a year of work, we all agreed on the following document that summarizes the basic principles.
In the spirit of open source software and the collaborative nature of the International Blockchain Real Estate Association, velox.RE has decided to share our “Blockchain Deed Protocol” with everyone. We hope other startups, property owners, government officials, and the wider industry uses it as template.
Once the pilot program participants reached consensus on the existing requirements and principles of a legal deed transfer, velox.RE designed and built the software to implement it on the bitcoin blockchain.
The pilot program participants unanimously agreed on this protocol. So we then moved forward with implementing and testing it on the velox.RE software.
We had a Chicago commercial real estate professional who wanted to transfer a property. We successfully tested the velox.RE software with him in person, on two different occasions, and with Trezor hardware wallet integration.
We concluded the pilot program with velox.RE’s successful software tests.
At velox.RE we are continuing to develop our comprehensive real estate platform and build our team. Title is just one of our applications. Our focus isn’t on governments, but on property owners and operators.
Some of the pilot program participants will be presenting at the International Blockchain Real Estate Association’s annual conference on October 10th, in conjunction with NYC RE Tech Week. I hope you’ll join us.