Drones and virtual reality are changing the way houses are sold, but the next revolution in real estate could impact how houses are paid for. Blockchain technology, the foundation of virtual currencies like Bitcoin, is poised to play a central role in tomorrow’s real estate transactions. Luxury buyers, in particular, should be aware of how their real estate transactions may be radically different in just a few years.

What Is the Blockchain?

In short, blockchains are online distributed ledgers used to record transactions. They are decentralized and public, but encrypted — and have the potential to reduce paperwork, eliminate fraud and speed up transactions. According to a white paper by financial services firm DTCC, adopting blockchains or similar distributed ledger systems could significantly streamline the financial process for nearly all transactions, particularly those involving government regulatory actions and bank oversights. Real estate is often cited as an industry ripe for revolution at the hands of the blockchain.

The Blockchain Promise

More Reliable Records

Blockchains have the advantage of being both heavily encrypted and easy to search. In fact, it’s these two fundamental properties that make virtual currencies like Bitcoin possible: All Bitcoin transactions are a matter of public record, and that public record cannot be changed. Bringing the blockchain to real estate could therefore disrupt the massive network of third-party escrow and title companies whose entire businesses are based on validating and storing records. Eliminating these players would streamline the process for buyers and sellers — great news for them, but not so great for companies offering title services.

Less Fraud

Because blockchain technology was originally created for Bitcoin, a virtual currency that’s not backed by any central bank or government, extensive audit trails were baked into its DNA. As a result, blockchains show records of who made a transaction and when, and these records cannot be forged. For real estate transactions, this means less opportunity to commit fraud by presenting falsified or forged records. This protects both the buyer and seller, particularly for luxury properties that are often bought in cash transactions.

Greater Transparency

With this new technology, public records are more than just a handy feature — they’re fundamental to the very concept of the blockchain itself. Without a ledger of transactions, there can be no trust or reliability. Not everyone is a fan of public records. Some ultra-wealthy are fond of obfuscating their identities in real estate transactions. Seeing every property purchase become a matter of public record, therefore, won’t go over well everyone. But with so much at stake, the industry will certainly find a way to thread this particular needle. It may be possible, for example, to maintain proper records — and enjoy the convenience and security of blockchain technology — while still allowing authorized agents to sign on the digital dotted line.

Less Paperwork

Finally, though it might sound trivial, reducing the amount of paperwork needed to close even the simplest property sale would result in vast savings of time, money and frustration. This may be the only blockchain benefit that disadvantages no one: Be they buyers, sellers or brokers, no one welcomes the mountain of paperwork that’s been part of the process for decades.

Barriers to Adoption

Complexity

In its current form, blockchain technology is difficult to understand, not to mention implement across an entire sector. As such, building blockchains is still a cottage industry where third parties are contracted to design, build, deploy and oversee industry-specific applications. This will change soon enough, as the technology gains wider acceptance and more financial professionals become conversant in blockchain-speak. Already, according to Coindesk, a digital currency trade website, Japan's Bank of Tokyo-Mitsubishi UFJ has developed its own digital currency “as part of its research into blockchain and distributed ledger technology.”

Industry Acceptance

Though industry advocacy groups such as the International Blockchain Real Estate Association are already pushing for blockchain adoption, the technology remains a novelty in this and many other industries. There’s also the potential for pushback. Title companies and other intermediaries could possibly lobby against this technology that may render their services obsolete.

Government Acceptance

Blockchain technology was specifically developed as an alternative to centralized, government-backed currencies. In the form of Bitcoin (BTC), it’s working: The price of BTC is climbing, and no government has control over its trading. Using the blockchain in other industries, and real estate especially, might require a certain level of support from the government. As Anthony Back explained, writing on Quora, “If government records didn't exist, how would a homeowner prove they own the property? With no repository of trusted records, anyone could potentially claim ownership of anything.” While some executives at the Federal Reserve have expressed interest in blockchain tech, don’t expect the U.S. to be an early adopter. That honor goes to the tech-forward Baltic nation of Estonia, which recently implemented a blockchain-centered national identification system.

User-Unfriendliness

One last hurdle sits between blockchain’s potential and its real-world roll-out: Making the technology more user-friendly. In addition to educating these users, this means the creation of Windows and Mac desktop software that works with blockchains, cloud-based services built specifically for the real estate community and mobile apps that rely on blockchains to conduct verification and anti-fraud processes. That’s no small feat. But it’s also a major market opportunity for startups and other software companies.

Looking Forward

In the form of Bitcoin, the bold experiment of blockchain technology is so far a success. Though the market for BTC is volatile, to say the least, there is real money being made. At press time, single Bitcoin was trading at $456; in 2010, one BTC was worth less than a penny. As a whole, the real estate industry will be slow to change its well-established ways. But the big players may not have a choice — already, upstarts are entering the market with new blockchain-based products and platforms. Ubitquity, for example, is a “blockchain-secured platform for real estate transactions” that’s expected to officially launch this summer. Flip, a peer-to-peer leasing marketplace, is experimenting with storing reports in blockchain format. Both hope to reduce, or even eliminate, fraud and create a more user-friendly experience. Time will tell if they’ll succeed. MORE From Mansion Global: