Blockchain replaces nothing but improves everything
January 8, 2020
Contributors: Wes Williams, ESQ., Nathan Wosnack, Sam Reynolds
In 2014 when we started our research into the blockchain, the technology that underlies cryptocurrencies like Bitcoin and Ethereum, there was a misconception within that community that this new and innovative technology will do away with the need for title insurance in a real estate transaction.
The belief being that a policy of title insurance, a product of which is generated through a search of public record documents, among other things, would be rendered unnecessary if the various record documents which comprised a chain of title to a specific parcel of land were stored and indexed in a time stamped, immutable and chronological database — like the blockchain — which cannot be altered or changed would render a policy of title insurance unnecessary.
In this blog post we will discuss in general, what blockchain is, what title insurance is, what it protects, and why blockchain technology will not eliminate the need for title insurance. While we do believe that the need for title insurance will not be eliminated by blockchain technology, we do feel it does have the potential to radically change the industry as a whole.
WHAT IS BLOCKCHAIN TECHNOLOGY?
Currently many blockchains exist in various forms with varying degrees of security as well as access. Blockchains can also be both public permissionless¹, which means there is no centralized control and anyone can access and participate in the network. In addition to private permissioned, meaning there is likely centralized control and permission to access and participate in the network is required.
A blockchain is essentially a database which maintains a digital record of transactions: the term “blockchain” is derived from its structure whereby individual records or transactions called blocks, are linked or “chained” together in a single list using cryptographic hashes. Blockchains are typically used for recording cryptocurrency transactions like Bitcoin and Ethereum smart contract² execution.
Transactions included on a blockchain are verified and validated by multiple computers on the internet. These computer networks are configured to allow peer-to-peer transactions to occur without the need for centralized recording of transactions. The network of computers collectively coordinate to ensure that each transaction is validated prior to including it within the blockchain. The decentralized nature of this computer network ensures that no single actor is unable to add invalid blocks to the chain.
Whenever a new block is included within a blockchain, it is linked to the previous block utilizing a cryptographic hash generated from the contents of the previous block. This ensures the finality and immutability of the chain, and that it is never broken and that each block is permanently recorded. Blockchains, like Bitcoin’s blockchain, are intentionally difficult to alter past transactions since all the subsequent blocks must be altered first. To do so requires a coordinated effort by 51% of miners and requires a large amount of energy.
WHAT IS TITLE INSURANCE?
According to Investopedia³: “Title insurance protects both real estate owners and lenders against loss or damage occurring from liens, encumbrances, or defects in the title or actual ownership of a property. Unlike traditional insurance, which protects against future events, title insurance protects against claims for past occurrences.”
HOW A TITLE SEARCH IS COMPILED TO CREATE A COMMITMENT & EVENTUAL POLICY
When a title insurance company obtains an order to open title file, a request is sent to the company’s in house search department to begin the research process. In order to keep overhead costs low, some companies will outsource this service to a third party abstractor or company who will perform the search on behalf of the requesting company.
Upon a review the public records, the individual researching the property will compile a list of relevant documents to create a chain of ownership, including encumbrances such as easements, agreements, covenants, mortgages, leases, liens, etc., and will reflect these matters in schedules⁴ A and B of the report and eventual policy.
Along with those matters the appear of record, a title company may also conduct a physical inspection of the property in question, or request a survey to determine matters that can only be ascertained by actually viewing the property, e.g. encroachments, certain equitable interests, prior work of improvement that would create a priority issue in a mechanic’s lien scenario as an example.
WHAT VALUE DOES TITLE INSURANCE HAVE THAT WILL NOT BE ELIMINATED BY THE BLOCKCHAIN?
As mentioned previously, blockchain evangelists have frequently touted the demise of title insurance based on blockchain’s immutable quality. However, there are a few issues that make a blockchain evangelists’ dream of completely eliminating title insurance a difficult endeavour.
While there are many reasons why blockchain will not eliminate the necessity for title insurance, the most common and obvious examples are: 1. State law considerations; and 2. Risk mitigation.
State Law Considerations:
In order for a grantee of real property to give proper notice of their interest to the world that they own a specific parcel of real estate, they must record their deed in compliance with a state’s recording statute. Most state recording statutes require that a deed be recorded in the official records of the county in which the property is located in order to provide constructive notice, i.e. notice given by way of public records.
Most statutes are currently not written to allow for constructive notice to be given via a blockchain. Therefore, in order for this to happen recording statutes in each state would need to be amended accordingly.
As stated, title insurance provides indemnity coverage for claims made by third parties against the named insured under the policy respecting title the insured property. Should a claim arise where title is different as stated in the policy, and the insured suffers a loss as a result, then a title insurance company has various options under the policy to establish title as insured. These options would include, but not be limited to: undertaking steps to cure the title defect by potentially filing a quiet title action, and/or defending the insured if a lawsuit is filed against them. Or in some instances paying the insured up to the limits of the policy.
While blockchains are good for creating a potentially unalterable, secure chain of ownership, which would likely work well to secure property ownership records, record matters are not the only matters that affect a title’s marketability. There are certain off record matters that title insurance policies provide coverage for that public records would not disclose, and which would require a physical inspection of the property in question. A few of those off record matters are listed above.
Blockchain technology, even with all its potential, will never fully eliminate judicial disputes over property rights; and title insurance offers insureds a tool with which to shift the burden and responsibility of defending and curing title onto the title company and not the property owner/insured. Thus, in our opinion, title insurance will continue to be seen as a necessary and useful tool to shift the risk of loss and/or cost of defense onto the title company should a dispute arise over ownership or priority rights despite the utilization of blockchain technology integration into the land records space.
HOW CAN BLOCKCHAIN HELP THE TITLE INSURANCE INDUSTRY?
Even though Ubitquity is of the opinion that blockchain will not eliminate the industry, it has created software applications in order to help improve it.
BlockSTRACT: A blockchain-powered module add-on for leading title & closing room platforms, allowing for the easy integration of the abstract process, an ‘Uber’ or “Freelancer”-like process of finding qualified abstractors and connecting them with title agencies looking to outsource the title search/production function; in addition to providing recordation of abstract research onto the blockchain.
BlockSTRACT is a platform, similar to upwork and freelancer, whereby a title company can place a request for work and many abstractors and title production vendors can bid for the work. The system plugs into most title production software and gives the title agency real time status of the product and more once an abstractor agrees to undertake the work at the agreed upon price.
“The abstract process is critically important to ensure there is clean title on the property being sold. BlockSTRACT brings all of this into the Blockchain era. We’re pleased to have already licensed this software in the United States and we have signed a letter of intent with a Maryland-based title and closing company.” — Nathan Wosnack (Founder & CEO)
SmartEscrow: Blockchain-based SmartEscrow Contracts allow for reduced overhead costs and mitigated risks. Once data is placed on the blockchain it can be easily retrieved and re-used without a need for further verification. The data becomes a single source of truth all parties to the transaction can trust without the need to reconcile.
Our software modules are available to integrate into your existing workflow immediately.
TitleToken: a token and marketplace that allows title token holders to list and market their tokens to title companies.
“TitleToken and marketplace will drastically change the way title and sold and purchased. Blockchain and tokenization technology has created a means to truly transform the title insurance industry. Ubitquity will be leading the charge with the industry to make this a reality.” said Wes Williams, Esq., VP of Product at Ubitquity.
While blockchain technology will not completely eliminate title insurance, we are confident it will help spawn many innovations and consolidate the market over the next decade; with companies like Ubitquity leading the way.
¹ Blockchain Council, “PERMISSIONED AND PERMISSIONLESS BLOCKCHAINS: A COMPREHENSIVE GUIDE”, last modified November 13, 2019 https://www.investopedia.com/terms/s/smart-contracts.asp
² Investopedia, “Smart Contracts”, last modified October 8, 2019 https://www.investopedia.com/terms/s/smart-contracts.asp
³ Investopedia, “Title Insurance”, last modified September 10, 2019 https://www.investopedia.com/terms/t/title_insurance.asp
⁴ First American Title Company, “WHAT TO LOOK FOR ON THE TITLE COMMITMENT” https://www.gofirstam.com/resources/real-estate-agents/what-to-look-for-on-the-title-commitment.html