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Introduction to blockchain in Real Estate · 2019-04-09 · Identity •Securely store, confirm and...
Transcript of Introduction to blockchain in Real Estate · 2019-04-09 · Identity •Securely store, confirm and...
0McKinsey & Company
Introduction to blockchaininReal Estate
ULI
Boston, October 2018
Matt Higginson
1McKinsey & Company
Blockchain – the emerging story
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• Experimentation with this relatively immature tech-
nology continues, especially outside financial services
• We are as inundated as ever with requests to advise
on current and future state of blockchain, crypto-assets
• However, perspectives are changing – early POCs are not
showing all the benefits that were promised
• Investors are becoming more circumspect and demanding
clearer evidence of benefits (revenue, cost, CX)
• From lessons learned, we are clearer on the more convincing
applications that truly demand the distinctive properties of blockchain
• We are also clearer on what you have to believe for blockchain to be a
success – or not
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What is so innovative about blockchain?1
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First ever solution to the double spending problem / data conflict resolution that doesn’t require a central administrator or clearing agent
Core innovation
Decentralized, unbroken historical record of all data transactions
Decentralized solution
The randomness of verification agent selection is imperative to maintain the database integrity
Process integrity
Messaging system with read/ write access protected by cryptographic keys
Data security Valuable Redundancy
Multiple copies of the same data across a large network increases resistance to malicious attack
Blockchain is a cryptographic or encoded distributed ledger, comprising a
digital log of transactions that is shared across a public or private network
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But blockchain is not a silver bullet and should be employed only under certain conditions and requirements
5 key criteria for
blockchain
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Distributedledger
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Remote independentwriters
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Existence in absence of trust
3Causingdisinter-mediation
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Economicbenefit for participants
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Blockchain technology is applicable across multiple use case categories as a static store of secure information or dynamic store of tradeable information
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Needs addressed by blockchain Real world example applicationsDescription
Transactions
Registry of tradeable information
• Manage registry of asset ownership • Provide automation of
specific assets
• Land title• Gift card ownership • Chain of custody
Identity• Securely store, confirm and
distribute identity-related info• Revise personal / other data
• Store bank/ digital personal identity info on blockchain to enable user to easily access proof of identity
Static
Registry
Smart
contracts
• Insurance claim payouts• Cash equity trading• Escrow payment services
• Create and execute semi-autonomous contracts on distributed digital platform
• Streamlined low transaction settlements to address liquidity mismatches in loan funds
• Exchange of physical and digital assets on a digital platform
Payments
infrastructure
• Peer-to-peer lending through the Bitcoin blockchain, dis-intermediating banks
• Efficient payment transfers with lower friction, improved record keeping
Dynamic
registry
Verifiable
data
• Secondary market for event tickets• Registry of independent artists’ work • Protection of Intellectual property
• Store of information and easy access to secure, dynamic information
Record keeping
Stores of static
information
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…but in many situations blockchain is a technology still seeking a successful business model and faces multiple headwinds, including lack of clarity of purpose
Operational
challenges
▪ Development of governing protocol
terms requires broad collaboration
▪ Need for consensus imparts
privileges on bookkeepers (miners)
Cultural
resistance,
mis-
understanding
▪ Operations heads fear disruption of
current revenue streams
▪ Senior decision makers’ mis-
understanding of benefits and maturity
hinder informed decision making
Hurdle Example
Cost
▪ Short-term expense pressures (12-24 mos)
conspire against implementation of
wholesale transformation program
▪ Tough to justify lead developer costs
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More than 60 real use cases (excluding Bitcoin) exist across multiple industries with a focus on financial services and cost reduction
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Number of use cases1, % by category
1 Blockchain solutions excluding solutions that are purely related to Bitcoin; 2 Includes insurance, real estate, automotive, energy, social sector, etc.;
3 In many instances use cases have a secondary intention; 4 Annual revenues >US$1m
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15 Revenue
Risk
Cost
PRIMARY INTENTION³
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27 Idea stage
In development (no output yet)
Tested but not yet commercialized
Commercialized -Not scaled
Commercialized -Scaled
LIFECYCLE
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614
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17 Payments
Register of Ownership
Identity
Securities
Healthcare
Consumer
Public Sector
Arts & Entertainment
Other²
INDUSTRY
Financial
Services
(~40%)
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Established corporations, startups, nonprofits, and governments are beginning to actively experiment with blockchains, often combined with crypto-assets
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Supply chainA
Capital marketsB
InsuranceC
HealthcareE
AutomotiveF
Public sectorG
Real estateD
Social sectorH
ExamplesKey value proposition
• Trading and post-trade settlement, compliance
reporting, collateral management, and contract
management
• Claims processing, back office efficiencies, product
development and distribution, information security
• Patient ownership of data, interoperability between
health systems, verification of credentials, and
supply chain controls
• Provenance of auto parts, data sharing for
autonomous vehicle research, supply chain
efficiency, and secure communications
• Securely storing citizen data, enhancing
transparency of public funds, using smart contracts
to reduce compliance costs
• Smart contracts for cash flow management,
ownership management (fraction or leasing),
property and identity due diligence
• Track & trace supplies, decrease costs by
consolidating data systems
• Traceability of donated funds, reduced transaction
costs, reduced administrative costs, new
fundraising opportunities
Stakeholders involved
• Retailers, CPG companies, manufacturers,
technology, certificate authorities, financiers, etc.
• Exchanges, market data providers, banks, clearing
houses, investors, issuers, and regulators
• Insurance carriers, IoT companies, forensic
engineering companies, agents and producers, and
3rd party administrators
• Healthcare startups, health systems, medical
suppliers, and IT infrastructure providers
• Autonomous vehicle researchers, automotive
suppliers, automotive OEMs, future mobility
services (e.g., ridesharing)
• All levels of government (national to local),
foundations, IT infrastructure providers, and
startups
• Mortgage providers, online marketplaces, property
managers, brokers, facilities service companies
• Established nonprofits, crypto-asset funding
platforms, companies issuing caused-based crypto-
assets
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Real estate could be transformed by lowering cost of sale /due diligence, title registration and enabling easier fractional ownership
NON-EXHAUSTIVE
Property search
and due diligence
process
High costs of
sale and leasing
Property and cash
flow management
Tokenization of
fractional
ownership
Details of the problem Cryptoasset or blockchain solution and benefits
▪ Lack of standardization in MLS systems
▪ Manual due diligence with physical documents
▪ Secure blockchain provides a single source of property documentation
▪ Validity of property data is ensured and audited by trustless system
▪ High transaction fees, especially cross-border
▪ Intermediaries demand high commissions
▪ Misleading fake reviews and forged ratings
▪ Blockchain transparency makes many intermediaries obsolete
▪ Owners can transfer title quickly without 3rd party verification
▪ Proof-of-Stake protocol used to incentivize fair judgements
▪ Manual supervision of property
administration and cash flow management
▪ Smart contracts can automate tasks such as paying taxes, escrow
▪ Smart contracts can enable automatic payments to contractors
▪ Investment requires large capital commitment
▪ Traditional pooling vehicles come with high fees
▪ Blockchain allows the tokenization of real world property assets
▪ Allows investors to buy and own fractions of a property
▪ Tokenization simplifies the distribution of profits to owners
▪ Listing on public exchanges facilitates efficient price discovery
SOURCE: Expert interviews; newsweek.com; cointelegraph.com; Forbes.com; ATLANT website; techrepublic.com
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More broadly, several challenges need to be resolved for DLT to deliver benefits and be adopted more widely over the next 3-5 yrs8
Challenges to widespread adoption
Immature technology and protocols
Slow progress to commercial deployment
Resolving the ‘co-opetition paradox’
requiring a lead investor creating
benefit for a whole industry
What needs to happen to drive adoption
Tech needs to evolve and improve
Killer applications evolve with a
convincing business case
Powerful authority or majority
player commits to pioneering and
accelerating adoption
National regulators should allow and encourage distributed ledger
technologies to evolve while adhering to “do no harm” policies
Need for dematerialization of paper records
Benefits from alternative technologies