Mortgage Matters article

Could blockchains transform the mortgage process?

Since it was first launched in 2008, the virtual currency Bitcoin has understandably attracted a lot of attention. Humans have been bartering with objects for thousands of years, with the first minted coin produced in around 700BC by the Lydians and paper money adopted by the Chinese during the Tang Dynasty (617-908 AD).  So the concept of a virtual currency was a new one.

That said, while you can now buy a variety of goods using Bitcoins, from illegal drugs and weapons to beer, jewellery or a stay in a hotel, for your average consumer it has had little impact. While the processing power of your computer may have been illegally hacked to help mine Bitcoins, I’d wager the chances of you having actually used a Bitcoin or one of the 700 other virtual currencies that now exist, is slim to none.   

In terms of it being a technology used by everyone from teens to grannies, like contactless payments or Paypal, it still has a long way to go.

However, the real revolutionary bit about virtual currencies has always been the underlying technology that they use – a type of distributed ledger called a blockchain.

The corner stone of financial markets over the last 600 years has been the double ledger accounting system whereby every entry in an account requires a corresponding and opposite entry in another. This insures that if I give you £100, that £100 is debited from my account and credited to yours. Clearing Houses and Central Banks have been integral to allowing this system of payments to take place.

Blockchains don’t require this. A blockchain is a distributed, decentralised database that maintains a continuously growing list of records. Each block is linked to a previous block with technology replacing the need for a third-party like a third party Clearing House or Central Bank to authorise transactions and manage updates. Virtual currencies like Bitcoin are the best known examples of the blockchain technology being used in practice.

But there are a huge range of potential applications for blockchains and firms across the world are already using blockchains in all different types of financial transactions, from foreign exchange and stock market trades to insurance claims and even the distribution of commercial music.

Another area that is being looked at is how blockchains could be used in the house buying/mortgage process. PricewaterhouseCoopers (PwC) will be doing a presentation on blockchains and how they could be applied to housing transactions at an upcoming BSA event in December for non-executive directors (NEDs). In preparation, PwC has put together a PDF explaining how this could be applied in practice, which you can view here.

PwC argues that blockchains could remove cost and friction from the process, create a tamper proof transaction history and reduce delays in exchange and finalisation.

For example, when someone buys a house, both their solicitor and lender are asking for identical items around verification of identity, income and other personal documents. Imagine if the intermediary, conveyancer, lender and valuer could all update the transaction blockchain as each bit of information becomes available – immediately you could reduce the overlap of work currently done.

Shared copies of legal agreements, full electronic audit trails, reduction in complexity and most importantly the opportunity to speed up the time the overall transaction takes to complete.

The important thing to note is that this is not just a sci-fi fantasy or wishful thinking. Around the world firms are looking to apply blockchains to housing market transactions.

A group of firms including HSBC and Bank of China Hong Kong are working to introduce mortgage services in Hong Kong. As reported in the FT and other publications, the group has already led tests on a property valuation system using blockchains, with the aim of launching it before the end of 2016.

PwC is actively working in this area, as are other firms and the Financial Conduct Authority (FCA) is directly engaged with firms in this area. Of the first cohort of firms to successfully pass the FCA’s eligibility criteria to access its Regulatory Sandbox, 5 out of the 24 involve blockchains (and another 4 involving other types of distributed ledgers). One of the firms is looking at how blockchains could be used by the Department for Work and Pensions to credit value to mobile devices.  

The pivotal question is how long for blockchains to actually be applied in the UK and specifically to the mortgage market. Ensuring that it’s done in a controlled and safe manner is imperative.

But with many sectors such as conveyancing still using the post and fax as their preferred method of exchanging documents, the potential to speed up transaction times could be immense.