blockchain applications in real estate finance: mortgage...

Blockchain Applications in Real Estate Finance:

Mortgage Origination, Securitization and

Servicing

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THURSDAY, OCTOBER 24, 2019

Presenting a live 90-minute webinar with interactive Q&A

Gordon Peery, Partner, Seyfarth Shaw, Los Angeles

Vasiliki Yiannoulis-Riva, Partner, WithersWorldwide, New York

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“Seyfarth Shaw” refers to Seyfarth Shaw LLP (an Illinois limited liability partnership). Seyfarth Shaw LLP

Blockchain Applications in Real Estate Finance

Gordon F. PeeryChair, Derivatives Practice

Team Co-Chair, Blockchain Technologies;

Institutional Investor Steering Committee Member; and

Partner, Real Estate Practice

Strafford Program - October 24, 2019

©2018 Seyfarth Shaw LLP. All rights reserved. Private and Confidential

Agenda

01 Program Introduction

02 Creating Blockchain and Using Smart Contracts

03 Blockchain in Real Estate

04 Legal Issues and Next Steps in the Evolution

©2018 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 6

PROGRAM INTRODUCTION


Your Speaker

Gordon PeeryBlockchain Technologies Co-Chair

and Derivatives Chair

Commercial Real Estate and

Finance Partner, Los Angeles

(213) 270-9607

[email protected]


Program Introduction

8

CREATING BLOCKCHAIN AND USING SMART CONTRACTS



I have no clue what Blockchain is.

I guess that’s how my grandmother

felt about the Internet.

-- Anonymous10


Creating Blockchain

and

Using Smart Contracts

➢ Working definitions of Blockchain, Distributed

Ledger Technology (DLT) and smart

contracts;

➢ Blockchain: a (very) brief history;

➢ Our presentation today: goals/objectives;

➢ A visual illustration of Blockchain: hashes,

nodes and nonces

(credit goes to the best visual demonstration of Blockchain:

“Blockchain 101 – A Visual Demo,” by Anders Brownworth, see

https://www.bing.com/videos/search?q=blockchain+slides+.pdf&ru=%2f

search%3fq%3dblockchain%2bslides%2b.pdf%26pc%3dcosp%26ptag

%3dG6C999N1234D010918A316A5D3C6E%26conlogo%3dCT321012

7%26first%3d21%26FORM%3dPERE1&view=detail&mid=56609AA427

F21207DCBF56609AA427F21207DCBF&&mmscn=vwrc&FORM=VDR

VRV -- last viewed on Oct. 22, 2019.)

11


A visual illustration of all things Blockchain

Anders Brownworth, Blockchain 101 – A Visual Demo

12


A visual illustration of all things Blockchain (continued)


13




14


What is Blockchain ?

(review, continued)

o Trusted: Can’t change any prior record without

leaving evidence of an attempt to change it;

Introduction to Blockchains by John Kelsey, NIST

15



16


What is Blockchain?

(review)

o Blockchain is a sequence of records contained on

an electronic ledger

o Invented by “Satoshi Nakamoto” in 2008 (“block” and

“chain” were previously separately used as terms but as recently

as 2016 they became “blockchain”);

o Intended to be a public transaction ledger of the

virtual currency Bitcoin;

o Enabled Bitcoin to be an early digital currency to

“solve” the double-spending problem in the

absence of a trusted “central” authority or central

server;

o Early models or predecessors of Blockchain are

very familiar to us, but nearly all of them are

centralized (Blockchain is not; it’s de-centralized and this is a feature

that prevents hacking / fraud / corruption);

o There are public and private Blockchains.

17


What is a Smart Contract?

o Smart contracts are electronic arrangements

whereby the transfer of an asset becomes

automatic.

o The nature of smart contracts is automatic because

these contracts are a series of “if – then”

statements with “electronic agents” carrying out or

performing tasks that were previously performed by

humans

o Smart contracts autonomously perform based on

programs – then performance is recorded in the

electronic ledger, across national borders…

o The whole point of these next-generation contracts

is to speed execution and make the contract

process more streamlined, efficient … fast

o Smart contracts raise myriad legal concerns,

challenge existing law and the application of that

law and may give one side of the bargain an “out,”

if it can be demonstrated that there was no

acceptance – so query: are these enforceable?

So how can there be a

“meeting of the minds”

if contractual performance

is by … machines?

18


Why do we care about Smart Contracts?

(review)

o Unlike traditional contracts, smart contracts are

made from computer code.

o The computer code enables the contract to run

automatically (according to designed functions).

o We care about this because the code can “live” on

distributed ledger technology (e.g., Blockchain), as

a part of the distributed ledger, and increasingly

more and more smart contracts are being used in

the real estate industry.

o In the real estate industry, smart contracts are

beginning to be used at every stage of the life cycle

of a real estate transaction (and not just purchases

and sales! Leases, etc.).

Would you like to buy an apartment in

Rome with your iPhone this afternoon?

Best source in this space:

“Formalizing and Securing

Relationships on Public

Networks”

by Nick Szabo (1997)

19


The anatomy of a residential real estate transaction using

smart contractson distributed ledger

technology


20


1. The buyer, Michael Arrington, pulls out his iPhone and opens the Propy Listing

Platform (https://propy.com), an application on his iPhone;

2. Buyer electronically signs a power of attorney issued to a Ukrainian lawyer*;

3. Buyer uses an electronic key and so does Seller to both access the platform;

4. Seller is Mark Ginsburg, a well-known real estate developer in Ukraine;

5. A smart contract verifies each key;

6. Buyer and Seller eSign a purchase agreement, complete with customary terms;

7. Buyer uses 212.5 ETH (USD60,000)(Ether, a token, on Ethereum);

8. Smart contract executes and both parties “perform”;

9. A hash of the .pdf of the executed purchase agreement is attached to the ledger;

10. Payment instructions (where Buyer sends the 212.5 ETH) provided to Buyer;

11. The Ukrainian lawyer* with Buyer’s power of attorney verifies execution/delivery;

12. A notary on the platform has a private key and the sale is recorded;

13. The National Property Registry now includes the purchase and sale;

14. Each step, from #2 to #13 here has “metadata” which is stored on Blockchain

In this way, a traveling Ukrainian (owner of an apartment in Kiev) sells that apartment

to an American buyer using an iPhone.

Source: “How a Smart Contract Replaced an Escrow Company in a $60k Deal, Natalia Karayaneva (Oct. 15,

2019), available at https://hackernoon.com/how-a-smart-contract-replaced-an-escrow-company-in-a-60k-deal-

551ff7839044, accessed on October 22, 2019

21

https://hackernoon.com/how-a-smart-contract-replaced-an-escrow-company-in-a-60k-deal-551ff7839044


Source: “Smart Contracts: Is the Law Ready?” Chamber of Digital Commerce (2018).

22

BLOCKCHAIN IN COMMERCIAL REAL ESTATE



Blockchain Applications in Real Estate

(see accompanying handout)

The “Big Four” Netherlands banks

got a big jump on commercial real

estate and other DLT applications

(two examples):

ABN AMRO: Torch

ING Group: Easy Trading Platform

24

LEGAL ISSUES

AND NEXT STEPS IN THE EVOLUTION


Law Tries to Catch-up with eSigned Documents, DLT and Smart Contracts


America:

1997: Commissioners on Uniform State Laws began drafting UETA, the Uniform

Electronic Transactions Act. Before UETA, state law required banks to retain physical

copies of all checks – so UETA streamlines / unifies law to bring society into the 21st

century. UETA’s purpose: remove legal barriers for electronic transactions…but there’s a

lack of uniformity (California, for ex., adopted UETA modifications);

2000: Congress adopts ESIGN, the Electronic Signatures in Global and national

Commerce Act. The point of ESIGN is to establish legal parity between blue-ink signed

legal documentation (e.g., negotiable instruments, promissory notes) with eSigned

documentation and ESIGN also further bolsters the legal enforceability of non-paper,

electronic transactions.

Europe:

European Committee for Standardization (CEN) and the European Committee for

Standardization electronic (Cenelec) publish in December 2018 a white paper setting forth

prerequisites for enforceability of smart contracts and transactions based on DLT apps. In

2019, Italy adopts legislation that sets forth the technical criteria which smart contracts will

have to comply with, in order to be legally enforceable. See https://www.agid.gov.it/en/agenzia/stampa-e-

comunicazione/notizie/2018/12/14/blockchain-european-recommendations-development-services-based-dlt

26


Blockchain Applications in Real Estate Finance

THANK YOU.

Gordon F. Peery

[email protected]

(213) 270-9607


27

Vasiliki Yiannoulis-Riva, Partner

[email protected]

Potential Impact of Blockchain in Real Estate Finance – An Overview

• Blockchain has the potential to completely change the way that

real estate finance transactions are run

– Digitalization/automation of transactions

▪ Smart contracts

▪ All aspects of a transaction, including contracts, diligence, closing

documentation, and transfer of funds will be conducted

through/recorded on the blockchain

– Tokenization

▪ Facilitation of fractional ownership

▪ Rise of secondary markets for the transfer of real estate

29

Potential Impact of Blockchain in Real Estate Finance – An Overview (Cont.)

– Enhanced data security

▪ Immutable records

▪ Reduction of fraud

– Reduction of “friction”

▪ Possible elimination of need for intermediaries (i.e., title companies,

attorneys, etc.)

▪ Shorter transaction times

▪ Greater cost-efficiency

- According to a Goldman Sachs estimate, blockchain technologies could lead to

an annual savings of $2-4 billion in the real estate title insurance market alone*

*Schneider, James et al. (2016), Blockchain: Putting Theory into Practice. Available at:

https://github.com/bellaj/Blockchain/blob/master/Goldman-Sachs-report-Blockchain-Putting-Theory-into-Practice.pdf

(Accessed: July 4, 2018).

30

Potential Impact of Blockchain in Real Estate Finance – An Overview (Cont.)

– Increased Transparency

– Elimination of the need to reconcile documents

– Payments of principal, interest, fees, etc. can all be automated

31

The Smart Contract

• Originally proposed by computer scientist Nick Szabo in the mid-

1990s.

• Consists of coded instructions and data

• Exists on a ledger (i.e., the blockchain), which consists of many

nodes

• Typically event-driven – “if/then” logic

• Self-executing (in theory)

– The network of nodes (and the smart contract itself) provide

validation that the contract has been completed

• No single source of control32

• Origination

– More accurate record-keeping/filing

• Due Diligence

– Can be entirely conducted through blockchain technology

– All diligence and reports, etc. to be migrated to blockchain and available to

potential lenders/buyers/investors

• Loan documentation

– All agreements can be generated via smart contracts

• Title/Escrow

– Title, like other due diligence, can be searched on the blockchain

– An escrow can also be set up on the blockchain

Applications of Blockchain Technology in Real Estate Finance

33

Applications of Blockchain Technology in Real Estate Finance (Cont.)

• After origination, lenders can use smart contracts/blockchain to:

– Track borrower payments

– Monitor covenant compliance

– Enforce obligations

– Detect defaults

▪ Cross Defaults

– Securitized loans

▪ Ownership history of and composition of each class of security

would be available on the blockchain

▪ Real-time data on loan payments

▪ Assist in pooling

34

Applications of Blockchain Technology in Real Estate Finance (Cont.)

• Other applications

– Loan participations

– Loan syndications

35

Real World Examples

• In July 2019, Germany’s financial regulator, BaFin, gave the

green light to a bond on the blockchain and secured by a

portfolio of real estate properties

• The LendingCoin

– FinTech company using blockchain technology to provide

asset-backed securities through a commercial real estate loan

portfolio

– Provides borrowers with access to financing

– Investors deposit their investment into the TLC account and in

turn, receive tokenized shares backed by real estate financed

and/or owned by TLC. Additionally, investors can track the

numbers of shares and properties financed/owned by TLC

36

Real World Examples (Cont.)

• Synechron

– FinTech firm that has developed a “blockchain accelerator” for

mortgage lending

▪ Offers a service for implementation of blockchain networks for lenders and

other financial services firms

• RealBlocks

– Offers a service to assist users in finding mortgage through a

mortgage brokerage partner.

– Partnered with SALT Lending to enable participants to take out a

loan or line of credit using the tokens they buy from RealBlocks as

collateral

37

Potential Roadblocks to Implementation

• Whether to use a private or hybrid blockchain (i.e., who can view

and participate in the blockchain?)

• Ensuring that data uploaded into the blockchain is accurate

• Are smart contracts valid for purposes of the Statute of Frauds?

• Will land registries accept e-signatures for land records?

• Decentralized, local nature of the record-keeping in the U.S.

likely to cause delays in migrating systems over to blockchain

• Practical problems

38

Potential Roadblocks to Implementation (Continued)• Resistance to change

• Blockchain/Smart contracts are not quite ready to replace every

trust system currently in place

– Young technology which does not yet lend itself to sophisticated

transactions

– “Oracle” problem

▪ In order for smart contracts to do anything useful, they need a reliable way

to connect with events in the real world

▪ Today’s oracle services are centralized, representing single points of

failure that are susceptible to tampering (and therefore defeat the purpose

of having a decentralized ledger)

• Valuation of real estate taxes where payment is in

cryptocurrency

39

Vasiliki Yiannoulis-Riva, Partner

[email protected]

Thank You

40