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March 2017

New distributed ledger technology creates smart contracts

By Jolene AndersonWhy should real estate practitioners embrace the practice of creating Smart Contracts? Jessica Edgerton, associate counsel with the National Association of REALTORSĀ®, urges real estate practitioners to adopt a two-step authentication process, which confirms your identity with both a password and a secondary code sent by text or phone call. Edgerton also urges agents to never conduct business over public Wi-Fi (source: REALTOR Magazine) and to take extra caution about what links they click on. "People are just so used to email as a form of communication and document sharing, and really it's not an ideal or secure form," Edgerton says. "Until the technology is able to be perfected and secured, everyone needs to stay aware of the problem and educate each other."

Blockchain, or Distributed Ledger Technology (DLT), is a new technology tool which every Realtor will want in their toolbox to create "Smart Contracts."

According to a recent Deloitte Global report, Distributed ledger technology (DLT), more commonly known as Blockchain, is challenging traditional business models and providing new opportunities to reinvent financial services, according to a Deloitte Global report. "Over the horizon: Blockchain and the future of financial infrastructure," addresses key uses for blockchain to transform finance.

While disruption and change are looked upon with skepticism, the facts don't lie: Our outdated technology tools leave our clients and our families open to attack from cyber criminals. We must evolve our real estate practice to utilize new technology tools to create smart contracts.

Let us look at the history of smart contracts. Nick Szabo, a cryptographer, in researching digital currency, is credited with coining the term "smart contract" in the mid-1990s.  Szabo's article, "Smart Contracts," originally published in early 1996 in the magazine Extropy, forecasts with prescient accuracy the benefits and parameters of the blockchain contract applications in development and making blockchain news headlines today. In his 1995 article, Szabo predicted that the digital revolution would drastically change the way humans make contracts, and he questioned even then whether our traditional contracts would continue to have a use in the cyberspace era. Smart contracts would improve execution of the four basic contract objectives, which Szabo described as observability, verifiability, privity and enforceability. Among other use cases discussed in the following sections, smart contracts according to Szabo "would enable both parties to observe the other's performance of the contract, verify if and when a contract has been performed, guarantee that only the details necessary for completion of the contract are revealed to both parties and be self-enforcing to eliminate the time spent policing the contract." (Source: Bitcoin Magazine)

Many of us remember using a facsimile machine in our real estate practice, which was useful to gather signatures amongst the parties for a contract or agreement. At the time, there was a certain amount of reluctance to conduct business in this manner; after all it was the first time someone could sign something, place it in a machine, send it from one phone line to another and deliver a digitally reproduced signature. The path this signature took was not controllable or traceable, and in most cases, it traversed miles of wire before reaching its destination, so how could it be considered a valid signature? The intentions of the signature were clear to everyone, but businesses wanted to know they could count on the validity of the signature, and if no one actually witnessed the action of one individual or of a corporation how could a business put any faith in it? The fax became standard operating procedure world-wide. The courts found validity in this method of signature capturing and businesses also felt secure in this method.

The development of the Portable Document Format (PDF) enabled the ability to scan signed documents and email those documents to the intended party. This was a logical next step as email soon became the standard by which we handle a majority of our daily communications. And, with this, came the benefit of having a permanent electronic version of the document and eliminating the task of having to file or re-scan the faxed document for retention. This afforded users with greater efficiencies and cost reductions, and helped us all become a little more paper-less. The government and regulators had no option but to accept electronic signatures and documents as being legally binding and electronic storage as meeting document retention requirements.

Following widespread business adoption, the ESIGN Act and Silicon Valley's penchant to innovate came the arrival of the next disruption: E-signature and document management providers, namely DocuSign. With their ingress (early 2000's) came the ability to electronically transmit, review and sign documents and agreements using a digital signature. Again, as we historically witnessed with new technologies, skeptics viewed this as a transitory technology that will never gain widespread acceptance and adoption; time has proven them wrong. Today, E-signature, is commonplace and is the new standard by which documents and agreements are handled.

The innovation that we have witnessed over the decades in the e-signature space naturally leads to more of the same: further innovation, newer products and services and greater efficiencies. This brings us to the next step in the e-signature evolution and the next disruption: Event-based authentication, using blockchain technology, provides the ability to electronically execute contracts and agreements, within your existing email platform, eliminating the requirement for 3rd party portals and interfaces. With that, users will be afforded a legal, efficient, and frictionless opportunity to sign contracts and agreements resulting in the reduction of transaction costs for individuals, businesses and their customers. With 3 Factor Event Based Authentication, parties to the contract or agreement will know, with absolute certainty, with whom they are communicating and contracting. Additionally, businesses continuity will be improved by having all email communications, content and their attachments, which are encrypted at rest, stored on an individualized, immutable and tamper proof ledger. Additional benefits include archival and reporting, including state changes of all communications, content, attachments and identity authentication activities.

Today's real estate practitioner can provide a greater level of security to their real estate clients by utilizing new technology tools which create smart contracts.

For more information on blockchain technology please feel free to contact: Jolene@ULedger.co.

Jolene Anderson is a licensed REALTORĀ® with Coldwell Banker Bain and an Advisor to ULedger.co.