Digital land register: Can the blockchain replace the notary?

The entire process of buying a property involves significant additional costs, which may well amount to more than ten percent of the purchase price. These include real estate transfer tax, which, depending on the federal state, is between 3.5% and 6.5%, possibly a brokerage commission of 3% to 7% and, in any case, the fees for notary and the land register entry. These vary from region to region, but amount to around 1.5% of the real estate price. But with blockchain technology, real estate transactions could potentially be processed faster and more cost-effectively.

Best practice Sweden?

The project, initiated in 2016, produced a blockchain-based application prototype which, following an agreement in principle, digitizes the further transaction process up to entry in the land register. This is done by allowing all parties involved — i.e. banks, the land registry office, brokers, buyers and sellers — to monitor the progress of the sales process. Strictly speaking, however, this is not a blockchain-based land register. Rather, the Swedish project is a digital platform based on the so-called private blockchain, on which only predefined participants, such as banks or the Swedish land registry office Lantmäteriet, are allowed to validate transactions.

Since the Real estate prices in Sweden Having risen significantly for years and are currently at a very high level, savings of around 100 million euros per year have been forecast as a result of digitized processes. At the end of the second project phase in 2017, there was a ready-made blockchain solution, which, however, was only used to a small extent and “was never integrated into the production system of the land register,” such as a Chief Information Officer of the Swedish Authority confirmed. However, this is not due to the blockchain solution itself, which works, but simply to the real environment: Before the solution can be rolled out nationwide, the legal framework would have to change.

Technical and regulatory hurdles: NFT vs. investment tokens

Buy real estate shares with NFTs

In Germany, too, there are technical and regulatory problems when designing a digital land register. A currently conceivable model is based on Non-fungible tokens (NFT). To date, this has primarily been used for digital works of art, such as the well-known “Everydays: The First 5000 Days” by artist “Beeple” , which changed hands for around 69 million dollars. Blockchain-based NFT technology has the advantage that digital objects such as art, but also other assets, can in principle be identified as unique and ownership relationships can be assigned.

In terms of the real estate industry, it would be technically possible to create unique land register entries for land in the form of an NFT on the blockchain. Whoever is the holder of the token owns the property and can also transfer it to other owners. By tokenizing property, ownership is recorded in a decentralized and traceable way and documented on the blockchain.

But the regulatory framework for NFT is problematic. For the buyer of an NFT, the question of what rights he actually receives to the “digital original” is particularly interesting. The rules for tangible works of art are clear: Paintings, sculptures etc. are eligible for ownership as movable property and ownership can be transferred in accordance with Section 929 p. 1 BGB.

However, tokens are not “things” due to lack of physicality and — in contrast to tokenized securities — move in a still unregulated legal grey area, which raises a lot of questions. Before NFTs can be considered to represent and transact real property ownership, legislators must therefore first define concrete, legal frameworks.

Participate in market opportunities with investment tokens

On the other hand, investment tokens that are over specialized platforms can be spent and traded. However, this does not tokenize the property itself, but its financing. After the investment amount has been reached, tokens are issued to investors and stored. They benefit from the regular payment of interest and, like an owner, participate in the performance of the real estate on a percentage of their held tokens. Financing a property in this way offers low-threshold access to the return opportunities associated with the property.

With the adoption of Act on the Introduction of Electronic Securities (eWPG) In 2021, the Bundestag paved the way for electronic trading in crypto securities or tokens. This abolishes the obligation for issuers to have a printed global certificate. Instead, tokenized securities can also be issued in a forgery-proof manner on the basis of the blockchain and stored in a decentralized manner.

In light of the German regulatory environment, real estate tokens are regarded as securities whose issuance is approved by BaFin. For investors, this means more security and the ability to trade tokens on a secondary market as well.

Is the blockchain land register also coming to Germany?

While investing in tokenized, digital real estate shares gain in importance worldwide, the digital land register is still a long way off in this country. This is because German law requires the involvement of a notary when it comes to real estate transactions. This includes their notarizations as well as the advisory and instructional function. The accuracy of the transfer of ownership must also currently be ensured by several authorities. In addition to notaries, these include the land registry office, banks and, for example, lawyers in disputed ownership cases. For this reason, far-reaching regulatory changes are needed before the introduction of a digital land register in Germany, which are unlikely to be implemented in the foreseeable future.

Tokenization as an opportunity along the real estate value chain

However, in the context of Digitalization of the real estate industry In addition to the investment tokens already described, a number of other attractive uses for blockchain along the entire value chain are also conceivable and desirable. This is because the market is constantly growing, but is characterized by slow, complex and costly processes that make it difficult for investors to enter the market. Blockchain technology already makes it possible to break up rigid structures and fundamentally simplify investing in real estate as part of decentralization and automation.

For example, it would also be possible to process a purchase process using digital identities and Smart Contracts represent as a series of blockchain transactions. In this way, relevant information would be made available and verified to buyers, notaries, banks, authorities and credit institutions along the process chain — which could result in significant synergy and cost savings effects for real estate buyers.