Tbilisi agreement heralds significant expansion of blockchain to manage property registries

On Feb 2nd, 2017, Papuna Ugrekhelidze, Chairman of the National Agency of Public Registry for the Republic of Georgia and Valery Vavilov, CEO of Bitfury, a blockchain firm, signed a Memorandum of Understanding to expand Bitfury’s work to support fixed property rights administration and “other government departments” with blockchain technology. According to Forbes, this will be the “first time a national government has used the Bitcoin blockchain to secure and validate official actions.” Ugrekhelidze and Vavilov signed their first MOU in April 2016 to pilot the use of blockchain in the process of buying and selling land in Georgia. This pilot with Georgia was Bitfury’s first departure from Bitcoin mining and hardware, into blockchain-software. The advancement of this project is significant for both Georgia and Bitfury.

Disclosure: Bitfury, NDI, and New America’s Tomicah Tillemann co-founded the Blockchain Trust Accelerator Initiative in 2016. BTA aims to connect governments with technologists and funders to hasten the adoption of the technology for social good and governance.

The project in Georgia is a groundbreaking, but the idea is not new. The use of blockchain to record property transactions was suggested in 1998, by Nick Szabo, a computer scientist who is often considered to be the real Satoshi Nakamoto (the creator of Bitcoin). Bitcoin is the first cryptocurrency and blockchain is a distributed database technology that enables cryptocurrencies. Blockchain records all transactions. One of the appeals of this technology is that – since it replicates itself and validates additional entries by consensus – it is “protected from cyber attacks and physical destruction because it was not in the records of a particular place, but throughout the world, [stored on] tens of thousands of computers.” (Quote is from the NAPR press release via Google Translate.) Just as a Blockchain can be used to record Bitcoin transactions, firms are also exploring how to apply it to everything from health records to votes, as well as property.

Before the Georgia-Bitfury announcement, the question was, who will go first? Multiple company-state collaborations announced they are working with blockchain and property registries, but no partnership has yet indicated they are as far along as Georgia – using Blockchain in their national registry on live transactions. Now the question is, will they succeed? The rewards of being a first mover with blockchain for property registries are not obviously greater than the risks. A well-functioning property registry is a valuable asset that facilities economic development and social stability, introducing a relatively new technology may expose the database to unforeseen issues. The reward is that, unlike a central database which offers the same benefits of digitization, it is almost impossible to go in and falsify records. Further, as was pointed out by NAPR, the blockchain resides in multiple copies in the "cloud," so damage or loss from conflict, accident, or disaster is not a concern. These are the two unique characteristics that a blockchain adds to a national property registry: immutability and cloud-based replication. Immutability would help in a country that seeks to avoid or reduce corruption but would be rejected by an actively corrupt system. Cloud-based replication would be interesting if a country felt the need to keep a registry far from harm's way.

COMPARING THREE COUNTRIES WHO ARE EXPLORING BLOCKCHAIN FOR PROPERTY RIGHTS

A review of the three case studies where countries that have publically expressed their interest in blockchain for property rights – Honduras, Georgia, and Sweden (the list keeps growing) – serves to illustrate the relevance of these characteristics. As a precondition, the relevant systems in a country should be in decent shape. The land administration system must function efficiently and the database optimized. When looking through these lenses, it becomes clear why Georgia is a likely and promising test bed for the application of blockchain technology to property registries.

Summary of country cases

The detailed walk through this analysis can be found at the end of this article in the appendix. Here is a summary of our conclusions. Honduras offered an example of a state that was not ready for blockchain in terms or systems or corruption. It is fair to assume they looked to Blockchain as a quick fix to a deeply challenged system but, there is still more work to do on that system before adding blockchain technology. Georgia provides an example of a state that is undergoing rapid change but has the support and sophistication to push ahead with blockchain. They have a very short cadastral history as a result of being a post-Soviet republic and as such have a relatively clean slate from which to being. Also, they have the threat of Russian aggression which makes an immutable registry attractive. While Sweden has yet to announce results, we have no reason to expect they won’t be successful.

BLOCKCHAIN AND PROPERTY REGISTRIES

The internet is replete with explanations of blockchain (see for example the FPR blog, PCMag’s cover story focused on blockchain). On the issue of blockchain and property rights, Chromaway has a paper, and the Bitfury press release has useful graphics. Instead of rehashing this material, we will highlight some points related to property rights. Specifically:

1. No blockchain will formalize property, prevent poor input quality or update itself.

2. The Bitfury solution will use two blockchains.

3. What will it mean when a private company from another country controls critical property records?

No blockchain will formalize property, prevent poor input quality or update itself

The blockchain is an exciting development, but we should be clear on what challenges will remain after implementation. There are three perennial issues: formalizing informal properties so they can enter into the registry, catching and correcting erroneous existing records, and encouraging society to update the registry.

First, blockchain does not directly facilitate land formalization. Documenting who has what rights to which land is a challenging process that is both art and science. Done well, it offers the promise of economic development, social stability, and resilience. Done poorly, it can calcify inequities and seed conflict. Property right formalization must be done carefully with experienced professionals and community engagement. Once rights are formalized, blockchain can record rights, prevent inappropriate alteration, allow appropriate update and provide access to information.

Second, the blockchain provides audit-ability and immutability from the current record through all transactions to the original entry. Having some process to validate files before putting them on a blockchain will be essential. Forbes notes that in Georgia “processes for verifying the accuracy of information that gets placed on the ledger have yet to be established.” No process is perfect, so they will also need a method for recording corrections to the private blockchain should conflicting claims or false documents surface.

Third, as properties are bought and sold, the challenge of any registry is staying current. Properties are sold or inherited in legitimate and reasonable circumstances, but not always recorded, for instance between family members. (That said, putting property registries on blockchains also lowers cost and as a result reduces a disincentive to register more transactions.) These challenges will remain for a blockchain enabled cadaster.

The Bitfury solution will use two blockchains, one to notarize and one to store

Bitcoin runs on a blockchain since it is the most established crypto currency, that is the largest blockchain and therefore the most secure. Space on this blockchain is precious, deeds and detailed property information are too large to put there, but short codes generated from the information within those documents can be. Each block has a name or label called a hash which is based on the information in that block. Bitfury is enabling Georgia to generate hashes based on the main documents that reside in a “private, permissioned blockchain” and then publishing those hashes to the Bitcoin Blockchain, not as block labels but as information within the block. If the document changes in any way, the hash it generates would also change, when compared to the hash published to the Bitcoin Blockchain, this would show that something was amiss. Therefore, the Bitcoin Blockchain becomes a notary for the main documents without becoming bloated with detailed property records; those will reside in the private, permissioned blockchain.

What will it mean when a private company from another country controls critical property records?

The private permissioned blockchain that contains the key documents of the registry and the ability to check the notarizing hashes is a technology that Bitfury has generated IP around and will likely offer as a service. But who will own the data? And will they have the capacity to use it? Are they buying a license or signing up for software as a service? Where are the servers for the private permissioned blockchain? These are questions that every country working with private companies to utilize this technology will have to answer. There is a strong argument that registries are “public goods” and that they should be managed and controlled by governments. This public-private partnership requires Georgia, Sweden and other countries that go down this path to speak to this concept.

CONCLUSION

Georgia, Bitfury, Sweden and Chromaway are leading property registries and blockchain enterprises into the future. We look forward to hearing more from them and sharing the lessons learned. If blockchain can be successfully integrated into a national property registry and become established, it will not only push the field forward but – as more technologists and their firms engage with registries – the understanding of how property rights formalization improves lives by facilitating opportunity will broaden. These technologies – from blockchains to digital imagery to dual-band GPS – are accelerating the process and reducing the cost of formalization.

APPENDIX – REVIEW OF HONDURAS, GEORGIA AND SWEEDEN AS TESTBEDS FOR BLOCKCHAIN & PROPERTY REGISTRIES

The following table characterizes the state of the property registry in three countries.

Sources: World Bank Doing Business Report, Transparency International 2016 Perception of Corruption rankings, IPRI Honduras case study, 2016 World Bank Group - Georgia Partnership Program Snapshot, Lantmäteriet 2015 Annual Report.

Honduras has fundamental reforms to complete before it improves the database

Factom was invited to Honduras to apply blockchain in 2015 and announced that the project stalled before the year ended. Both the government and the company have offered few details about why the project stalled. Based on the analysis to follow, the technical system is not mature enough, and the key ministry is too corrupt to embrace blockchain.

Preconditions: State of the property registry system & database

A study from 1999 describes how, since the first registry in 1881, the colorful and often unfortunate history caused national land administration to suffer. Renewed interest in reform coincided with a World Bank project in 2004. Followed quickly by a second project which closed in January 2017. Despite the over $60M invested in those two projects, the bank still scores the system 14 out of 30 on quality. The existing process involving six procedures over 22 days ranks 85th in the world. The database still has room for improvement on digitization and harmonizing the cadastral mapping. The merit of adding blockchain to this system at this point is less than obvious; energy would be better spent investing more aid to support reforms. Blockchain does not replace a property registry; it enhances it. A relatively well functioning baseline, above that which we find in Honduras, is required.

Value of immutability/How relevant is corruption:

The Transparency International score of 30 out of 100 has only improved by two points in four years. The IPRI Honduras case study paints a grim picture citing “466 criminal acts of corruption.” Corruption is a significant challenge for Honduras, and things are not changing quickly. Once something is put on a blockchain it cannot be altered so it may be beneficial in Honduras. But no magic precludes false data from being entered into the blockchain. Given the prevalence of corruption in the National Registry, it is not yet time to transcribe it with the indelible ink of blockchain.

Value of indestructibility:

Honduras does not face exceptional threats and has no reason to put their registry in the cloud.

Georgia may be in the sweet spot for the introduction of blockchain

Bitfury announced they were piloting blockchain in Georgia in 2016 and announced that the project was advancing in 2017. Based on the analysis to follow, the agency and technical system may find success with blockchain. There are also external threats which may be helping to generate a sense of urgency.

Preconditions: State of the property registry system & database

Georgia is a post-Soviet republic. When it became independent in 1991, it was a country where all land had been state-owned. (Section 3.6, page 45.) As a result, the modern cadastral history of Georgia is only 26 years long. (To put that in perspective, Honduras has 136 years of transactions, inheritances, court rulings and documents to consider for land claims. Not to mention any fraudulent documents that may also exist.) Georgia has also received significant international aid for its land administration. “In 1997, the process of creating formal mechanisms necessary for establishing the land market and improving the legislation was launched with the financial assistance from international donors (mainly, USAID, German Bank for Reconstruction and Development, World Bank and UNDP).” (page 5) More recently they have received support from Swedish Sida, the World Bank, and USAID. This support is needed since there is still a significant amount of land to register. The 2016 World Bank Group - Georgia Partnership Program Snapshot states that while Georgia “has a modern national registration agency, it is estimated that only 15–20 percent of land titles are registered” (p. 8). In spite of having more work to do, Georgia has built a world class system and earned strong scores and rankings. It takes one day to complete one process there at no cost, and they are ranked third in the world by the Bank with a quality score of 21.5 out of 30. As the World Bank pointed out in the Doing Business report, the Georgian property registry already has a fully computerized/digital single database, digitized maps, and a central database checks encumbrances (p. 51). Their land dispute resolution system scored 7 of 8 (p. 53). This combination of a sound system and well-designed database could successfully absorb the technical enhancements of blockchain technology.

Value of immutability/How relevant is corruption

The Transparency International score of 57 out of 100 has improved by five points in four years. The OECD opened their 2016 anti-corruption monitoring report of Georgia with the clear statement “Georgia has achieved remarkable progress in fighting corruption over the past decade.” Based on these data, while corruption is an issue it is being addressed and changing quickly for the better. The immutability of the blockchain would reinforce this trend.

Value of indestructibility:

Georgia has a long history of conflict with Russia, who sits across the northern border. The last war was the Russo-Georgian War in 2008. Less than six years later, just across the Black Sea from Georgia, Russia annexed Crimea. The possibility of a global superpower invading your country may put a blockchain supported property registry in a new light. Having the national registry, complete with each transaction, immutably recorded and replicated would be useful in putting a country back together after an occupying force leaves. The security of blockchain is also enticing if you are worried about cyber attacks. The Atlantic Council noted that the 2008 war was the “the first ever combined kinetic and cyber-attack.” While the armed conflict only lasted a few days, at least one subsequent cyber attack by Russia has been documented.

Sweden will be fine

Chromaway announced they were piloting blockchain in Sweden in 2016. Based on the analysis to follow, the agency and technical system are ready for blockchain.

Preconditions: State of the property registry system & database

Lantmäteriet, Sweden's National Land Survey agency, has been mapping Sweden since 1628. It takes seven days to complete one process there at the cost of 4.3% of the property value, and they are ranked tenth in the world by the Bank with a quality score of 27.5 out of 30. Their maps are fully digitized, and the property registry and cadastral maps use databases that share common identifiers. Sweden is a source of both aid and expertise on matters of surveying. Perhaps not coincidently, they had a team in Georgia to support "the quality of information technology development” on the day that the second Bitfury deal was signed. To give a sense of how and detailed their data is, in 2015, Lantmäteriet helped to recreate the entire country in Minecraft, complete “with roads and railways." Sweden's systems are likely capable of incorporating blockchain.

Value of immutability/How relevant is corruption:

The Transparency International score of 88 out of 100 hasn’t changed in the past four years. Sweden is ranked 4th in the world. Corruption is not a concern.

Value of indestructibility:

Sweden’s last war on their soil was in 1814 (they won). Physically securing the cadaster is not top of mind. Unfortunately, the same is not true for Russian fake news and potential cyber attacks. There is some merit in securing the registry via the blockchain, although it is probably less compelling that maintaining their leadership in the field of cadastral science.

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