In response to “the block chain […] could help you buy your house”
Yesterday, there was quite a good piece in the CityAM by Jerry Norton from CGI. He discussed uses of the block chain in banking. He probably means shared replicated ledgers (“SRLs”) but that term has not permeated into the main stream media yet.
Adoption has multiple advantages: from eliminating error and reducing manual processes, to lowering operational costs and improving accuracy and transparency. Ultimately, this could lead to a large number of ‘back-office’ roles common in today’s banks becoming extinct in the medium term.
All true. And:
The exciting part is that the ‘ledger’ doesn’t have to be a traditional ‘balance’: It could be any asset that can be represented in digital form.
He then makes the leap to say that ‘smart contracts’ — known hereafter as dumb contracts, as they are not smart — can be used to automate the delivery vs payment (“DvP”) workflow when buying a house:
With the blockchain concept of a smart contract, the exchange of the deeds and the funds transfer could be proven, linked together automatically, whilst happening in near real time and theoretically on a 24/7 basis.. The same principles are true for many asset types and purchases, such as buying a second-hand car — a process fraught with risk today.
I’m actually in the process of buying a house and I believe my experience is of some relevance here.
Contracts were exchanged months ago. The vendor currently has the place let out to a family, so in order for the transaction to complete, we require vacant possession, i.e. the tenants must be gone.
The tenants agreed to leave on 8th July and as per the contract, we were due to complete 10 days after this — 18th July.
Sadly, the tenants reneged on their promise to leave the house and as of 22nd July, we have no concrete date to complete the purchase.
UK law significantly favours the tenant in this case. The only way to remove them from the property would be to obtain an eviction notice through the courts.
This takes 2–3 weeks to obtain and as the tenants have young children, the courts are unlikely to force them to leave immediately.
To further complicate matters, we have a “long stop” date on the contract. This is legal jargon for:
The last date by which something must be done. I.e. the transaction must complete by this date, otherwise the contract is terminated.
The long stop date is in 10th August.
We vacate our flat on 31st July.
Unless the tenants leave on their own terms, 10 days before the long stop date, the property will go back on the market and we will be homeless.
In essence, both parties to the transaction are at the mercy of the tenants
The tenants are unpredictable — this is pretty much a hallmark of most human beings.
Other property examples:
- Absentee or uncooperative freeholders, refusing to sign lease agreements.
- Extensions with no building regs or planning permission.
- Boundary disputes.
- Vendors leaving tonnes of stuff in the property.
- Money laundering revelations which come to light the day before completion.
- One of two buyers dies in a car crash a week before completion. There’s now not enough money to complete, yet the deposit has been paid.
- Fraud involving fake conveyancing solicitors absconding with cash.
Put simply, smart contracts cannot capture the human elements of business. They are not designed with human behaviour in mind.
Instead, they are designed for simple, deterministic workflows and they are no more effect than standard business logic you’ll find in a standard ERP system.
The smart contracts solution
In our case, the answer might be to employ the use of an infrared satellite oracle.
The oracle could ascertain the location of the tenants primary residence and update the — now smart — contract in real-time.
If their primary residence is still the property in question, then the contract will know that vacant possession is not possible, thus will not complete on the date stated.
The dumb contract could just be over-ridden by the purchaser’s and vendor’s solicitors, in which case, is there any need for smart contracts in the first place?
Humans are smart, contracts are dumb
It seems to me that ‘smart contracts’ only work in scenarios where there’s a distinct absence of any unpredictability. As soon as the business logic cannot deal with the situation, humans will have to take over anyway.
Are we jumping the gun?
Of course, it’s great to have a vision of what might be possible in the future but it’s also important to concentrate on what’s possible now.
For smart contracts to work we need an appropriate platform for them — the SRL.
There has only been one reasonably successful implementation of a SRL to date. That’s Bitcoin and Bitcoin has it’s own problems.
All the other remotely credible SRL implementations are still a work in progress.
Lets crack the SRL first and then build the ‘business logic’ platforms afterwards.