Blockchain: New Anticipated Impacts on the Title Insurance Process
April 10, 2018
There's always excitement surrounding new technologies in the title insurance industry, but few innovations have as much potential to disrupt the industry like blockchain technology. This distributed ledger technology (DLT), best known as the technology that underpins cryptocurrencies like Bitcoin, is beginning to make its way into the title insurance process. Like with past tech disruptions, there is speculation that blockchain could make the whole billion-dollar title industry obsolete. However, this scenario is an unlikely one. As the industry grapples with the challenges and opportunities of blockchain, a better picture of anticipated impacts is forming.
Progress Toward the First Blockchain Title Registry
Earlier this month, the Wall Street Journal reported that Sweden might be the first country to adopt a national blockchain title registry. The Lantmäteriet, Sweden's 400-year-old land mapping and registration authority, is asking for volunteers to participate in blockchain land title transfers. The article reports that the Lantmäteriet is already paperless and digitized, however, recording a transaction can still take three to six months following the signing of a purchase contract. Enthusiasts for blockchain innovation hope that time could eventually be reduced to mere hours. Other countries are said to be pursuing similar projects. The Republic of Georgia has reportedly stored one million land title transactions on a new blockchain ledger over the last year. India, Saudi Arabia, and Kenya have also announced interest in establishing blockchain registries. Though some smaller countries may be able to institute a national land title registry via blockchain, it looks more likely that a distributed ledger system adopted in the United States will itself be distributed among local record offices.
Challenges for Public Records Agencies
Across the U.S., local authorities are also studying the technology and looking for opportunities to modernize and adapt. One challenge is the sheer number of American agencies that handle land documents. According to one report, an estimated 3,600 counties, towns, and other jurisdictions maintain records of local land title transactions. Some older records have not been digitized and can only be viewed by visiting a town clerk's office. Still, several states are making plans to embrace blockchain technology. According to a report in the Wall Street Journal last fall, Vermont is one state that is further along in the process. Legislation has already been passed that legalizes the use of blockchain to store land titles for when the technology is ready for implementation. "If you were to design a [title] system today, it would look a lot more like what people are talking about in terms of recording electronically and through something like the blockchain than the system we have in place now," Michael Pieciak, commissioner of financial regulations for Vermont, told reporters.
Getting Out in Front of Industry Disruption
Like state authorities, title insurance companies are also studying blockchain technology closely. It is important to ensure that companies are "in the driver's seat versus being in the passenger's seat," Steven Gottheim, senior counsel of the American Land Title Association, a key title industry trade group, told the Wall Street Journal last fall. "The lesson you can see in the industries that have been disrupted [is that the greatest danger is to companies that] don't realize new technology is coming," explained Gottheim. Title recording through blockchain technology has already undergone testing, according to Gottheim. IBM and R3 CEV, a technology startup, reportedly conducted those tests. Many in the title industry see an opportunity for increased efficiency and accuracy with blockchain. "[It] would be a great thing if we could have all records digitized and available online and available in a low-cost and speedy way of finding them, searching and analyzing them," Gottheim said.
Blockchain's Impact on Fraud and Errors
Proponents of blockchain technology often tout the safety and security of transactions. Recently, the Wall Street Journal even noted that blockchain technology is "practically bulletproof when it comes to fraudulent transactions." It's true that blockchain transactions are designed to be immutable, meaning that a false property record could not be inserted into blockchain ledger. However, advocates of blockchain technology sometimes take this further, speculating that the security of the technology makes the role of title companies obsolete. This is unlikely to be the case, as title companies do much more than simply check documents for fraud. For example, in the report "Blockchain: Putting Theory into Practice," Goldman Sachs noted that about 70 percent of title searches find no defects, while 30 percent find some form of defect. Defects don't have to be fraud. Most defects do not involve a total failure of title, but more often questions over easements, covenants, restrictions, and so on. Errors often accumulate over time. Property owners may marry, divorce, have children or pass away. Mortgages are recorded and later satisfied, while liens may be filed and later released. For those titles with defects, title companies manually review and clear such defects. Without title companies searching, finding and clearing such defects, experts say the percentage of defects would increase significantly in only a few years, as more and more transactions are recorded. Thus, while blockchain would solve some fraud and error issues, other errors may go undetected without proper title insurance procedures.
Title Companies After Blockchain
While it's certainly true that blockchain looks set to disrupt parts of the title insurance industry, it's important to remember that some parts of the industry may feel little impact. Title companies play an important role in examining and repairing public records on an ongoing basis. This function would likely continue after the implementation of blockchain technology in the industry. Title insurers also deal with claims from insured homeowners and lenders, absorbing legal defense costs of the insured party or covering the loss of the insured party in the event of a sustained claim. These functions also are less likely to be impacted by blockchain. The most likely impact of blockchain on the title insurance industry today would be the eventual implementation of blockchain title registries. These changes would certainly affect the process of title search requests, certifications of title and the issuance of policies. However, the industry is likely to successfully adapt to these changes, while continuing to perform other key functions in real estate transactions.