Sally Holdway & Hugo Pickford-Wardle
Founders of Keyzee introduce their company and discuss the legal issues of transferring real property using blockchain.
You can find transcript of their talk below:
[Slide 01]
Sally: //music before the lunch break, and we thought, “To hell with all of that – time for the exciting world of land transactions and conveyancing in the UK,” so woohoo, exciting times ahead!
[sl02]
We thought we’d share the story. This is the story of our little law tech startup called Keyzee. I’m one of the co-founders, Hugo is going to speak to you in a moment, he’s the other co-founder, and we came to this project by slightly different routes. Hugo’s background is in technology, but he decided to move house last year. For those who have gone through the conveyancing process in the UK, I think it’s listed as the third most stressful at the moment, after death and divorce, and think Hugo will testify this experience pretty much the case.
I, conversely, have spent the last 20 years on the other side of the desk. I am a conveyancing solicitor, and I’m getting better every day. But to be perfectly frank, it’s just as grim from the other side of the desk: the process is fundamentally broken. So we thought we could build an app, have a little tech startup that would help solve the problem.
[03]
And we know this is a big problem. This is one of my favourite little cartoons about the conveyancing space, having to do property searches, but I can tell you that this is a pretty accurate representation of my training, it looks pretty much like that, and we know this space is broken. There’s around about a million public transactions in the UK over a year, a third of those fall through, and a lot of them fall through because of the glitches in the current system. That’s costing the UK around about £300 million a year in lost fees, and it takes on average four months to get from offer to completion, which in this day and age is just astonishing.
[04]
So, as a startup we thought how are we going to get to this problem, and we obviously thought of a chatbot, what self-respecting startup doesn’t have a chatbot, so this is ours, this is Buddy, who helps people through the home moving process, and actually he’s done a pretty good job, Buddy has. Off the back of this we’ve been able to put some products out in the market, which put guarantees around the conveyancing process which haven’t existed before: we can guarantee that you’ll own your house within six weeks. Six weeks is pretty embarrassing actually in this room, saying that six weeks is a market leader, but actually it is in the legal space.
[05]
However, we’ve got aspirations to do much more. We want to build AI into our tools to be able to predict move dates, and we fundamentally want to get to zero-day conveyancing and achieving that through having a lawyerless process.
[06]
At this stage we’re a bit stuck as far as the current system. The regulation, the legislation that sits around it is a barrier, it’s a barrier to us being able to achieve this, so it has sent us really back to the drawing board and thinking about how are we going to change the conveyancing process in the UK.
[07]
Just a bit more detail on what those problems look like in the legal space. In a nutshell, a little education on the conveyancing process for you here, it can be drilled down into three core areas: we have data, gathering data up from various different places, then sticking some decisions around that data, and generally speaking that’s come by the conveyancing solicitor at the moment, and then once the lawyer has decided that the property is good and marketable, we then handle some transactions off the end of it, most of them financial transactions.
[08]
Just to clarify here as well: there’s various different elements for law that we’ve been talking about today. We’ve been talking about how we facilitate smart contracts, and then if the smart contracts go wrong how the lawyers deal with it and what elements they get involved with in the process. We’re layering law on top of lawyers, we’re trying to get to the part which is basically grounded in the legal world, which brings with it a whole heap of other challenges and problems as well. But we’re not talking about once it has fallen off the cliff; we’re talking about the stuff that’s at the top of the cliff, so the contracts that facilitate the property transactions. And, rather challengingly, the legal space is not known for being particularly adept at change, in fact, actively change averse you could say. So we’re relying on the lawyers to bring in and facilitate the types of change that we think needs to happen, and to talk about open source concepts to a bunch of lawyers, generally speaking they’ll break out in a cold sweat: it’s fundamentally the opposite of what they’re trained to do, which is all around client confidentiality and not sharing ideas. We have two really different cultures that we’re trying to push together here.
[09]
Back to the data problem. If you move house, amazing solicitors, as just part of their job, will probably spend around about six or seven weeks gathering data from a whole different load of sources, and again this is a pretty accurate representation: a lot of it is sitting in filing cabinets in paper form in the 200 local councils up and down the country, be it the Land Registry, be it at the Water Board… That’s the scale of the problem, and it’s an absolute logistical nightmare to pull it all together.
[10]
But on top of that we’re also asking the wrong questions. This, again, is something we’ve alluded to in the sessions this morning: where do we draw the line and say, “What are the questions we should be asking?” What we have on the screen here is actually a list of standard inquiries which are sent out today on public transactions in England and Wales. My particular favourite, I have to say, is the franchise rights: again, hopefully to clarify, as a right to hold a fair. [11] Now, I’d really like to have the right to hold a fair, I must admit. But in this day and age, is it really a question that we should be asking in every single transaction? Completely irrelevant. It goes back to the legacy system, which is common law in England and Wales, we’ve built on top of precedent after precedent to get to where we’re at today, but actually there’s no resemblance to how people are living in their properties at the moment.
[12]
This has led to more problems, what we describe as notional law. Because the systems are no longer fit for purpose, in order to be able to facilitate transactions lawyers are having to get quite creative and come up with workarounds to fit in with the system. We’ve got a few examples up here, one of which is searches’ shelf life. As part of the amazing process the lawyers will commission searches, they are sent back from the local authority, containing information about the property, and those search shelf lives, the legal community decided to have a shelf life of six months, so therefore a lawyer has six months to complete the transaction. Now, if you’re the poor purchaser and the process takes more than six months, it’s tough luck, that’s just the way of things. But unless we have the shelf life, because the data isn’t real time and accessible, that’s the workaround that lawyers have come up with, which again is just not fit for purpose.
[13]
So, we thought to ourselves, “If only there was some way to replicate all this entirety of data in an online presence which is secure in real time…” I don’t know if any of you guys have got any ideas on what that could possibly look like, but we’re all ears.
[14data] [15]
That’s the data problem. We then move on to the decisioning process, how do you decide then whether you’re going to proceed with a transaction. At the moment, that decision rests with the lawyers. This then leads us into another question about what are the roles of lawyers today and what are they going to be in the future, and fundamentally there has already been significant shifts there. Back in the day when I was a trainee solicitor, one of my roles was to be the keeper of all the information: I had a big stack of legal books behind me, and someone would come in and say, “Can I have that legal agreement?” and I would scurry and get the book, open it and the right page and there you could have the information. Well, that’s gone, all that information is out in the open, we can all access it whenever we want to, but then that leads on to further questions as to what the role of the lawyer should be. At the moment, they are still doing the data gathering and being the keeper of the information, but they just haven’t realised that the world has moved on. But they are also spending time being interpreters of that information and then hanging advice off the back of it.
When we talk about law, we’re also talking about just loads and loads of different industries and spaces as well. This particular one, conveyancing transactions of residential properties, is not particularly complex. Working on the old 80-20 rule, the majority of transactions happen in exactly the same way, asking the same questions to get to the same answers. Lawyers are following checklists to get to this decisioning point, so there’s no reason at all why this cannot be moved into the online arena.
[16]
Just to illustrate the point, this is actually a contract for sale we have up here for land in England and Wales. Don’t get me wrong, there’s two or three pages of small print that sits behind that, but that’s standard wording and very, very rarely gets changed. The only variables are on this front page, and the variables are things like the seller’s name, the buyer’s name, the purchase price and the move date, all of which is not rocket science really; we don’t need a huge amount of programming to be able to facilitate getting this into the online arena.
[17]
About getting residential transactions into the smart contract arena: for various reasons around funding and a lot of things that the Law Society don’t generally ask questions on, it didn’t come to fruition, but actually the one on the right-hand side is a bit more interesting. The Land Registry had a stab at this about 20 years ago, and they came up with this idea of something called a chain matrix. As you can hopefully see there, there’s a whole heap of things that needs to happen along the top, down the side are all the parties in the chain of transactions, so multiple transactions, the idea being that when all the red crosses turn into green dots, an automatic exchange of contracts happened and the legal ownership of the property would transfer. A fantastic idea; if only someone could replicate that. Again, for various reasons, mostly around nature of the legal industry, we still have 5,000 conveyancers all dabbling in this space at the moment, that didn’t happen, but the aspiration was clearly right.
[18data] [19]
Finally, just to talk about the transaction. I think the main issue we have here is that, as a home mover, the ecosystem is completely broken. Conveyance is just one part of this journey; you also have to sort out your moving company, your lender, your estate agent, your insurance company, and no one helps you to bring this all together and it is all very much siloed. To have some kind of facility whereby we can start to pull all of this together is really going to build a much, much better consumer experience.
[20]
We know the current system is unfixable. We happen to think that blockchain and smart contracts has got to be part of the conversation today. Again, we’ve had various frustrations that industry meetings that talk about this are talking 10-15 years down the line; this is a conversation we need to have today, because we cannot make any substantial changes to the current legal system unless we start to engage with this now.
[21]
Of course we’ve got the problem that then sits with that, as to how to issue all these smart contract that we’re talking about today into the current existing legal system. We think the answer is to create what we’ve called parallel legal management. [22] One example of that is the regulation path that sits around conveyancing is we have something called reserved legal activities, and what falls off the back of that is for signatures of deeds at the moment you still need a wet signature. That’s one example of a barrier at a statutory level that needs to change before we can properly facilitate online conveyancing. We’ve got a three-pronged approach: the top one is to work within the existing parameters, so that’s what we’ve been doing with the chatbot in Buddy, which we think had an impact. Secondly, we need to start experimenting in parallel with the existing process, to be having blockchain smart contracts mirror the process that’s going on at the same time, allowing us to iterate and learn. Then thirdly, we have this concept of what we call a beneficial ownership sandbox. Whilst the legal title remains as it would normally be, the beneficial ownership which sits behind the curtain if you like from a legal perspective there means that we can start to get really creative with how we are redefining the value of property and how that is transacted. I’m going to hand you over to Hugo now who will explain more of the thinking on that side.
Hugo: I’m Hugo Pickford-Wardle, I’m aware that we haven’t got very much time so I’m going to try and nip through some of the points on how we’re going to actually do this, probably most interestingly the focus on the actual…
At the moment, the problem is the data model that we have for property – and for a lot of assets actually we have talked about, for music that Imogen was speaking about – are completely broken. The data models across the ecosystem are not talking about the same asset, so we can’t create any smart contracts, because we talked before about any ambiguity being an issue in those contracts. At the moment, the Land Registry thinks in a two-dimensional plane, and actually lenders focus a lot more on the structure on that plane.
[sl24]
This is a flat that’s on the third floor of a building. None of the data models have any representation of height above ground, for us to actually be able to identify that specific asset.
[25]
If we can create a data model… This is my drawing of a property prism, and basically that’s an actual representation of what we’re talking about. The pipe underground is unowned space, the outline is the owned space, which is the outline of the land with the structures, and that’s a tree with a Tree Preservation Order on it.
[26]
If you can break that down further, it actually gets to the level of granularity where you could start changing things like lending decisions. Things like those are a great, interesting system that’s global, that breaks things down into a square, but we need to make that three-dimensional. We actually need to make it solar ready, because we know that people are trying to go and inhabit the whole solar system. So if we try and start actually thinking about how we create a data structure that incorporates those two things, we at least have some way of talking about an asset that we’re trying to create the smart contracts around. If we’re able to do that, and that part, to be honest, is again about trying to get the legacy organisations to put out their data into that model.
[27]
We can then build a layered application, and there’s a lot of work going on looking at land registries going and using the immutability of the blockchain, which is a great starting point but is actually right out of the base. I think that the need to actually be able to make actionable truth on the blockchain is something that Vinay pointed out to us, and the role of insurance rather than the actual data… The data that I just talked about in that model is a huge volume of data and is never going to be able to be directly linked to the blockchain, but we can start to put insurance against that to actually create a model that can work at the scale and speed that we need it to.
We actually have blockchain, smart contracts and tokenisation as three different concepts that apply to different layers in this model, particularly using smart contracts and blockchain to change how the actual transactions are able to be dealt with, both globally or on UK residential transactions, means that we can actually start thinking about how tokenisation can unlock the true value of property. As a startup guy, I have capital in my house right now that I can’t access because of the way that that illiquid asset is being treated in the current financial systems. I’ve just been speaking to someone today who is thinking about how we can reduce the cost of lending and take that cost away from the consumers. The economic impact of those two things is absolutely transformational, and the more we dig into all of the technology side of things, the actual specific technologies are not the hard part. It’s everything around it, the systems that already exist in any business, which is around sources of capital, around liability in the whole ecosystem and where that liability is held, and how people offset that liability in their business models; those are the things are going to actually drive the adoption of these new models. I’m very happy to be kind of be able to share a model of how it can work, but it is actually now that we’ve realised that we need to actually build a coalition business to be able to make this work in practice. Because one of the differences between the sorts of innovations that a lot of organisations have been engaging in and this sort of innovation is the absolute need for open innovation and collaboration across ecosystems to really realise the benefit.
[28] [29]
I just want to focus on one point, which is this: when we look at tokenisation, we can really start to unlock the true value of property. If you go to the seaside and see a nice house that you think would be a good Airbnb property, at the moment if you try to get everyone in this room to own that property, the cost of ownership and splitting up and actually managing that would make the whole proposition untenable. If we can lower the cost using these technologies down to make that cost negligible, it entirely changes the relationship that we can have with property. We can start to split out very clearly the ownership of property versus the occupancy of property, and I’m talking about residential property; the same applies to commercial property. If you look at one skyscraper, it’s about a billion quid’s worth of ecosystem just in one of those structures, and actually the differences between residential and commercial start to disappear, and you start to have a completely new way of engaging with something that has been the core of the economy for a very long time, for a very good reason, so I’m very excited about the work we can do. If anyone else is interested in the property space specifically, this is an open effort, we do need to all work together, so do come and talk to myself or Sally. Thank you very much! [applause]
[19:30]