Blockchain applied to land registration: or lead to a new round of global financial crisis

The blockchain-based land registration system may create new non-performing assets and lead to a new round of financial crisis.

Third World nations from Honduras to Georgia are working to establish land titles through blockchains, a mechanism that proponents of the system argue will allow marginalized residents of the world’s slums to use newly recognized property as collateral.

Commoditizing people’s homes and using them as financial instruments was at the heart of the 2008 financial crisis. The connection between these distressed assets and blockchain-based property solutions, which are still in the early stages of implementation, deserves close scrutiny. If people do not learn the lessons of the last financial crisis, there is a high risk that the impact will be rapid and severe for the world’s most vulnerable groups.

Land grab fever

Many economists consider the 2008 financial crisis to be the worst since the 1930s. The cause of this man-made disaster was the securitization of housing mortgages.

Predatory lenders issued mortgages to unsuspecting victims in the form of NINJA (no income, no job, no asset) loans. These financial instruments were forced on people with no hope of repaying them, and the result was that countless families lost their homes when the system collapsed in 2008.

Hernando de Soto, a Peruvian economist and president of the Institute of Liberty and Democracy, argues that residents of third world slums, such as the Mumbai slums depicted in the movie Slumdog Millionaire, are fundamentally shut out of global capital markets because they cannot get credit.

Property ownership in slums

Officially, these people are homeless, lacking government certification of their place of residence. But there is also indisputable evidence that the opposite is true. Often members of these local communities are aware of each other's de facto property rights, which are recognized and respected.

Previous attempts to title property in these slums have failed because corrupt governments have arbitrarily allocated land rights based on personal preferences or influence. The Semantic Blockchain presents an attractive alternative, with a consensus mechanism that ensures that most residents will act in good faith and assign addresses correctly.

De Soto said in a public statement: “Of the 7.3 billion people in the world, only 2 billion have legal, valid, public title to their assets. If there is no legal record of ownership of something, it cannot be used…As for collateral used to obtain credit, it is something you can use to transfer some of your property and invite investment. Things are owned by people, but if they are not recorded or documented, they cannot perform their function of creating capital and credit.”

Distressed Assets in Marketing

A collateralized debt obligation (CDO) is a structured asset-backed security (ABS). It was ultimately developed for the corporate bond market, and as CDOs evolved into a market that encompassed mortgages and mortgage-backed securities (MBS). Prior to the 2008 financial crisis, some MBS issuers, such as the largest mortgage lenders in the United States, Fannie Mae and Freddie Mac, guaranteed against homeowner default risk by requiring private mortgage insurance when lending loans, but in these loans, borrowers only had to provide a down payment of less than 20% of the total purchase price.

Decentralized Insurance

These financial instruments, which contain distressed assets and necessitated infamous government bailouts, could also be the driving force behind the creation of the world’s first digital currency.

P2P, decentralized, and even forced insurance are concepts that have recently gained traction in the blockchain community. A smart contract insurance system was born out of the London FinTech Week blockchain hackathon, which can provide instant compensation for various claims.

With pilot projects for blockchain-based land registries currently underway, it seems likely that a network of mortgage-backed securities created by the first third-world borrowers will not be far off.

It is conceivable that in the foreseeable future, these insurance contracts will work together with the self-executing smart contract mechanism to create a MBS DAO (decentralized autonomous organization), which is likely to bring about a new wave of housing financialization.

Learning from the DAO debacle

Under the authority, repayments can be automatically allocated and assessed, allowing an industry known for its opacity to begin providing more transparency to customers and regulators.

To prevent ourselves from getting too excited, we would do well to remember the recent disaster of the DAO and manage our excitement. Systems like the one described above could unlock enormous economic potential, or, to paraphrase Michael Lewis, a new doomsday machine.

Karl Marx said: “History repeats itself, the first time as tragedy, the second time as farce.” Let’s hope that MBS’s DAO doesn’t prove this famous quote true again.