Real Estate Investor Magazine South Africa September 2018

TECHNOLOGY PART 2 Smart contracts a game changer BY WERNER RIEKERT I n part one of this series on the impact of blockchain on real estate (found in the August/September issue), we looked at how blockchain technology will transform the way land ownership and title deeds are transferred, re- corded, and protected. In this part, we will focus on how blockchain based real estate transaction would work and what the implications of this would be. Hailed as the biggest digital innovation since the inter- net, blockchain is the infrastructure that is changing the way people interact, transact, and exchange. It is a technol- ogy that, for the first time in history, guarantees any infor- mation (i.e. contracts, documents, assets, ownership, value, etc.) is 100% correct, original, and has not been manipu- lated. Although this already sounds remarkable, blockchain has one more trick up its sleeve, Smart Contracts. What is a Smart Contract? In 1996, over a decade before Bitcoin came to market, digital currency pioneer and computer scientist extraordi- naire, Nick Szabo, introduced a contractual protocol that was entirely self-executing. We call this protocol a “smart contract,” an encrypted and trackable agreement between consenting parties. Since the dawn of organized property exchanges, real estate brokers, agents, governments, and legal entities have existed in pairs. Sometimes they coexist productively, but more often than not, the cross-industry dialogue is a pain point. We need legal representatives to outline the terms and ensure these terms are met by all parties including, land registry, bond/mortgage providers, surveyors, the buyer, the seller, and agent etc. With a high-value exchange depen- dent on the compliance of such an immense web of people and organizations, the process frequently encounters long- term setbacks and unexpected tribulations. Smart contracts eliminate the number of hands involved by cutting out extraneous third parties. Who remains? The buyer, the seller, and in some cases, the agent. The conditions are established and then programmed into a smart contract that lives on the blockchain. As soon as a predefined condi- tion is met, it will trigger a reaction automatically, and the contract self-executes. The process remains relatively similar to tradition- al contracts. A property is selected through a blockchain multi-listing service or agent, negotiation takes place, terms are agreed upon and a smart contract agreement is programmed. Payments and cash flow, real-time status of transactions and ownership transfers are all automated. However, this all happens without any legal involvement as smart contracts cannot be broken, manipulated or cor- rupted. Property Listing The property listing market is dominated by centralized, sometimes monopolistic listing platforms which are of- ten subscription-based, charging high fees and subject to human error. These intermediaries have cut off the direct connection between the asset owner and customer. A block- chain-based listing gives the connection and valuable in- formation about users back to the asset owners and allows users to view information such as the properties location and history, ownership information and the title informa- tion. Using blockchain for the property search process will reduce transaction costs and be more secure and efficient. Due Diligence Currently, the due diligence process in a real estate trans- SA Real Estate Investor Magazine SEPTEMBER/OCTOBER 2018 15

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