You’d have to have been living under a rock if you haven’t heard of blockchain: the dramatic rise of bitcoin and other cryptocurrencies over the past few years has made the time ripe for this new decentralised data management technology. This article zooms in on the “disruptive” potential of blockchain for a few specific areas within the Dutch property sector. Is all the buzz just hype, or is there really a new revolution around the corner?
BIM and blockchain
A construction project depends on information exchange. In recent years, we have seen big changes in the information processes in the construction sector, and almost everything has moved into the digital realm. Document management systems and Building Information Models (BIMs) have become the standard. These systems have taken the sharing of knowledge about the construction project to a new level; now, all the stakeholders can enter, update and change project information.
Blockchain presents an ideal way of saving and sharing information, but at present there is still no blockchain-based information management system. If anything, the trend is towards requiring the use of the current BIM processes. This is why no one can say (at least, not yet) whether BIM approaches and/or the systems behind them will be influenced, or even replaced, by blockchain-based systems in the foreseeable future. This will depend on the added value that blockchain technology ultimately proves able to deliver. If that value is limited, then blockchain will ultimately have little to no impact on BIM processes.
Construction contracting and property transactions: smart contracts
Every construction project involves multiple agreements. In the traditional construction model, this will be a contract of services with the architect and the main contract with the builder. For new construction projects, combined sales and building contracts are common. Whatever the type of contract, in it the parties normally set out in writing what performances will be rendered, under what conditions. Often the contract will also stipulate a commonly used set of general terms and conditions to govern the agreement; in the Netherlands, these include the UAV 2012 and the UAV-GC. For the subjects on which the parties do not make any specific arrangements, the law prevails.
Blockchain technology has the potential to change this conventional contracting practice by enabling the contractual arrangements made to also be documented in programming code, which would allow the contracts to partially perform themselves. With this feature, contracts would become “smart contracts”. For example, a smart main contract could be programmed to automatically transfer an agreed payment instalment X days after the agreed delivery deadline of a performance has passed.
The most significant caveat in the use of smart contracts has to do with the fact that many of the contractual arrangements and performances are not binary, that is, not exactly “either-or”, while program code is. As a result, the question of what the parties are justified in expecting from each other will often depend on various circumstances of the situation that are very difficult, if not impossible, to code in advance. The expectation is therefore that human intervention in the drafting and performance of smart contracts will continue to be necessary in the vast majority of cases even if smart contracts become the new standard in construction projects or in general contracting practice.
Another caveat is the immutability of a smart contract programmed in the blockchain: if the parties agree that the “smart” programmed contract is in practice being performed incorrectly on a certain point, it is essentially impossible to go back and fix the code. While this property of blockchain is generally proclaimed as an advantage in information systems and information-sharing processes, for the reason that it prevents surreptitious fraudulent modification of the code, this would more likely be a disadvantage in contract practice. It appears that drafting and management of contracts is still something that requires human action, and will remain so for the foreseeable future.
Property transactions: notarial transfer
A third innovative application of blockchain for the property sector is in property transfers. Because blockchain is built on a peer-to-peer network, in which all links of the chain (the nodes) validate and save a transaction, it eliminates the need for a trusted third party to guarantee the validity of a transaction.
The trusted third party in a Dutch property transaction is the civil-law notary: the law determines that only a civil-law notary can effect a valid transfer of real estate. The legislator considered the mediation of the civil-law notary essential “in the interests of protecting the public” and for the purposes of legal certainty:
(i) to guarantee the origin of the real estate, (ii) to prevent legal problems in the arrangements made between the parties, and (iii) for reasons of documentation and evidence (and preventing the loss of such evidence). These elements can also be guaranteed using a blockchain-based log, which has the added advantage of reducing the transaction costs and increasing the transaction speed. Whether the guarantees that a technological process offers can ever substitute for the advantages of human interaction (for example, a civil-law notary’s assessment of the state of mind of a contract party or vitiated consent), however, is very much in question. This is why the legislator can be expected to be hesitant to eliminate the requirement of a human third party for property transactions, particularly in view of the magnitude of interests commonly involved. Whether at any point in the future the civil-law notary will become redundant in property transactions is a question first and foremost for the legislator: as long as the law requires a notarial deed for the transaction, there will be no significant changes to the transaction process as it currently stands.
This article has looked at the “disruptive” potential of blockchain technology for selected areas within the Dutch property sector. But blockchain also represents potential changes for other areas, for example the registration of property in the public registers and privacy law issues. Unfortunately, addressing these goes beyond the scope of this article. The general conclusion that can be drawn is that any major changes that blockchain will bring are still a long way off. But it’s important to be aware that what is holding back the dawn of a “blockchain revolution” has more to do with legal restrictions and the strong position of already existing standards in working processes, rather than any deficiencies in the potential of the blockchain technology itself. That said, we have seen how this potential is not unlimited, for example in the area of “smart contracts”, because the binary nature of a coding-based solution inherently entails a limited capacity for taking over the very human activities of contractual coordination and performance. Human action will still be required – for now. But the blockchain story is just beginning.
If you have any questions about this subject or would like more information, contact one of the attorneys of team Real Estate. They will be happy to tell you more.