Monday, June 5, 2017

Trust on the Blockchain: ChromaWay's Swedish Land Registry project - Part 1

ChromaWay is a major innovator in blockchain technology, headquartered in Stockholm. ChromaWay is developing - together with other collaborators - a blockchain-based solution for the Swedish Land Registry. ChromaWay recently completed the second phase of this project (which it calls a "testbed") and has now published a report. Last week I spoke with ChromaWay’s Henrik Hjelte and Ludvig Öberg about the Land Registry project.

The blockchain has been called the "trust machine." In the blockchain’s original application, supporting bitcoin transactions and accounts, there is (it is asserted) no need for counterparties to trust each other. Indeed, counterparties know nothing of each other’s identities beyond their encrypted keys. Nor need they trust the accuracy of the records located on the blockchain; the distributed nature of the blockchain as well as the incentives provided the various nodes assure that tamper-proof records are identically preserved at each node. The blockchain itself is the ultimate reality of bitcoin; bitcoins exist no place else, and one securely owns the quantity of bitcoins the blockchain records. Where there is no need for trust, parties can deal directly and need not rely on intermediaries. The role of trust in more complex applications is more nuanced. While the character of required trust may be altered on the blockchain, the need to trust may not be entirely eliminated.

The Swedish Land Registry project is a different application from bitcoin. Here the blockchain is reflecting events and states in the real world. Land conveyancing involves multiple and distinct categories of players: buyers, sellers, real estate agents, banks, and the Land Registry itself. As there are more players - and as these players serve different roles in the prototypical conveyancing transaction - there are varying forms of 'trust' that are eliminated, reduced or maintained.

The Land Registry Project is designed to break down a typical Swedish land purchase transaction (including mortgage financing) into steps and to locate (and somewhat automate) many of these steps onto a private blockchain. The Swedish Land Registry project is one of the most sophisticated and elaborate concept projects yet undertaken in the field of Financial Technology. If successfully developed and implemented, it would serve as a model for other countries where right holdings in property are much less secure than is the case in Sweden. Even in Sweden, a country with good records, a trusted public authority and end users that conduct themselves predictably and reliably, placing land conveyancing onto the blockchain would bring considerable advantages.

The central node of this project remains the Land Registry - its records will be distributed on the blockchain. There is an important conceptual mystery here: is the ownership of Swedish land authenticated (as in the past) by the Land Registry - in which case all the blockchain is doing is distributing a record? Or are the distributed records, once authorized by the Land Registry, themselves the unique source for the authentication of land titles?

In either case, one would have to 'trust' the Land Registry in posting its determination of title. And this trust would include (1) the exercise of Registry's inherent legal authority to determine titles, (2) whether the human actor within the Registry has acted within her authority, and (3) whether internal to the Registry no error in the determination of title has occurred. Trust would include accepting that the party identified as the Land Registry on the blockchain is indeed the Land Registry and not a hacker. The blockchain would eliminate the need for trust as to the accuracy (or ‘truth’) of the Land Registry's records on the blockchain: one needn't worry that these records have been superseded or tampered with. And, importantly, there would be no exposure to the double-spend problem with respect to any particular property.

Of course buyers and sellers of properties never completely trust each other (even in Sweden); and the conventional conveyancing patterns address these concerns. The Land Registry project brings a great deal of transparency during the various phases of the transaction which will allay concerns about non-performance (if not actually reduce risk). The seller can see that the buyer has posted a deposit and that the buyer's bank has committed purchase financing. And the buyer can effectively 'lock' the subject property on the blockchain during the pendency of the transaction, preventing a 'double spend' conveyance to another.

In the end it may be speed more than transparency that operates to eliminate the need for trust. The Land Registry testbed report anticipates large gains in transaction speeds. Shrinking what now is a four-month process to a few weeks (and eventually approaching real time) will significantly reduce the risk of non-performance.

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