The world over, the real estate sector will have to go through many changes in order to implement blockchain in a big way. If India’s realty sector intends to adopt blockchain, a large number of changes will need to be implemented across diverse functional areas with an emphasis on boosting operational efficiencies within them, says Amit Aggarwal, Partner, SNG & Partners.
In an exclusive interview with Sanjeev Sinha, Mr Aggarwal shares his views on how blockchain technology can boost the operational efficiencies of real estate and whether the sector is ready to adopt blockchain in a big way. Excerpts:
How can blockchain technology boost the operational efficiencies of the Indian real estate sector?
Blockchain technology enables a lot of features which are very important for the smooth execution of a transaction. An important aspect of a real estate transaction is with regard to title change of a real estate project or property. If a property transaction could be executed through blockchain, transfer of property from one person to another is facilitated in a seamless manner. Adoption of blockchain also helps in avoidance of frauds in real estate transactions. When any real estate transaction is processed through a blockchain, it needs to be approved by the people who were part of that blockchain from the beginning. It effectively means that no new person can be added and gain access to the transaction without prior approval of users who own the transaction.
When the transaction is approved by all concerned parties, it ensures; a) the title is clear, b) they are ok with the transaction to be noded to the third person, c) the flexibility and the security of the transaction to avoid any fraud is enhanced manifold. Adoption of blockchain accelerates the speed of execution of transaction and substantially reduces instances of fraud. If blockchain technology is also linked to movement of funds, it helps in execution of transactions at an expedited pace.
In your opinion, is the Indian real estate sector ready to adopt blockchain in a big way?
We have to take a global overview of this issue and not just examine it from the perspective of the Indian real estate sector. The world over, the real estate industry will have to go through many changes in order to implement blockchain in a big way. If we purely focus on the Indian real estate sector, we have to bear in mind that real estate is a state subject in the country and not a Central subject. States have their own set of rules which will impact a real estate transaction. If the real estate industry in the country intends to adopt blockchain, a large number of changes will need to be implemented across diverse functional areas with an emphasis on boosting operational efficiencies within them. The operational efficiencies of computers on which the blockchain would be run will need to be enhanced vastly. This is because when a blockchain transaction is undertaken, there is large-scale consumption of data and electricity. For a normal transaction, there is a registry where you get the document registered which is a legal requirement.
The law stipulates that any transaction executed with purpose to create any right, title or interest in relation to an immovable property with value exceeding Rs 100 should be compulsorily registered with the concerned sub registrar of assurance under whose jurisdiction the property is located. The sub registrar’s office serves as an authority or registry where all data and information regarding property transaction is stored. If one takes recourse to the blockchain technology route to register real estate transactions, the utility of the registrar or sub-registrar’s office would be rendered ineffective. The undertaking of due diligence of a property intended to be purchased by a user is implausible within the ambit of blockchain. The intent of blockchain is to undertake all transactional activity in a digital format and do away with usage of physical paper.
Nevertheless, blockchain also talks about smart contracts. If there is a need to record a smart contract between the transacting parties, we need to examine what utility blockchain will bring when paperwork is not completely excluded. A key challenge area within the blockchain domain would be to ensure how stamp duty payment is done, whether there is a need for the creation of a separate registry where documents would be available for inspection by a third-party for a fee. If that is done, it takes away the entire confidentiality and secrecy associated with blockchain. These issues remain unresolved currently.
Can you elaborate on the benefits of tokenizing real estate transactions?
When we talk of tokenizing real estate transactions, we are normally referring to fractional ownership of assets. In this case, one would put a property onto a crowd platform and people may pick up a part of it. Then, they are in a position to swap those fractional ownership tokens from one person to another in an effective manner. Tokenization of real estate is like demat of a share. When one does dematerialization of shares in register of members of company, the name of depository NSDL comes in. NSDL maintains another register which makes share selling fast and convenient. The tokenization of real estate will give a push to crowd funding platforms associated with real estate. It also brings in lot of liquidity in relation to a real estate property as people will be in a position to buy a property in part or whole which has been represented through tokens.
Such transactions can be done seamlessly as a token is like a digital share which can be traded effectively among people. The transaction settlement happens very fast as it is happening between identified persons and people who are registered with that particular crowd platform. While tokenization brings in value propositions in terms of trading and liquidity and global investors, the pain point with this concept lies in the fact that it is not in vogue. There are a few entities who are doing it and at present since there are not many investors coming on to those platforms to buy and trade in real estate through tokens, there is almost zero liquidity.
How can blockchain-based smart contracts make real estate agreements seamless and hassle-free?
This is a difficult question to answer as today we are not sure whether by introducing blockchain technology how role of sub registrar of assurances and stamp duty payments will work out. Even if one does tokenization, it would be like an NFT which is akin to a smart contract. While the movement would be fast, it will present key challenges in the form of how to deal with the current regulatory regime which creates a lot of bottlenecks at this particular juncture to enable smart contracts of NFTs in the effective implementation of blockchain technology.
Is there a need to implement regulatory mechanisms to govern the functioning of blockchain? If yes, could you elaborate on the reason for the same?
The importance of implementing a regulatory mechanism for governing blockchain transactions cannot be undermined. The regulator can be the Ministry of Information and Technology who can act as a guiding regulatory authority or frame a new regulatory authority to deal with blockchain. When blockchain technology is implemented in real estate transactions, authorities like stamp authority and sub registrar of assurances comes into the picture. Today, unless Acts like Transfer of Property Act and Registration Act are modified, no clarity is brought regarding payment of stamp duty under the Indian Stamp Act as applicable to various states, no clarity is forthcoming regarding working of public-private encryption keys would work in blockchain, would it be an open or closed source.
Unless the regulatory mechanism is established in relation to these things for blockchain, this technology would not be very effective or implemented in a very conducive manner. The biggest pain point here is real estate remains a state subject and blockchain is a Central subject. The states and the Centre need to adopt a cogent approach to bring in effective implementation and monitoring to ensure that real estate transactions are effectively implemented through blockchain.
