Hong Kong Looking Seriously at Blockchain for Mortgage Solutions
In a territory where housing prices are expensive and mortgage practices complex, blockchain can help simplify matters.
Hong Kong is one of the most important financial centres of the world, but with limited space and high demand, property in Hong Kong has always been in short supply. Simplifying home ownership in Hong Kong is therefore a prime concern for the Hong Kong government, which has undertaken a number of measures in the last few years to make home ownership both affordable and easy.
The Nikkei Asian Review reported that as recently as early November, the Hong Kong government raised stamp duty to cool down the boiling Hong Kong housing market. This measure of the government was mainly aimed at outsiders, whom had been driving up home prices.
Blockchain can simplify complexities
A proof of concept report published by the Hong Kong Monetary Authority and the Hong Kong Applied Science and Technology Research Institute, covers issues related to Distributed Ledger Technology (DLT) - an example of which is Blockchain - and aims to provide the FinTech industry in Hong Kong with a study of the benefits, risks, key features and potential of the technology.
The report looks at the potential of DLT across mortgage loan applications, trade finance and digital identity management. Of particular interest is the mortgage loan application process, where DLT can accelerate things and remove complexities.
The report states: “Banks need fast and accurate information about the estimated value of a property in order to make good credit decisions. However, communication between banks, law firms and valuation firms remains a largely paper-based and (sometimes) error-prone process. A DLT network that connects these participants could therefore be helpful for them, for example by enabling them to confidently share copies of digitised valuation reports and legal documents or even transfer titles, thus reducing the time and cost of transactions.”
How Hong Kong envisions the future of mortgages
At the moment to purchase property, Party A typically sells to Party B, upon which a sale and purchase agreement is signed. Party B obtains a mortgage from a bank, which transfers funds to the seller’s bank on a fixed date.
Thereafter the change of ownership of the title is submitted to the land registry. In reality though there are more parties involved, as property surveyors are typically hired to assess the value of the property and lawyers maybe required to draw up legal agreements. In the future the land registry database, which holds all the relevant information about the property, may become the key.
A DLT will allow various parties to access the information and the seller’s digital signature would be required to finalize the sale. As information will be stored on distributed nodes, the transaction can be initiated by the bank and sent to all other nodes in the DLT, and validation can happen on the Blockchain.
The report envisions that: “As each node holds a local copy of the ledger that contains a complete set of the historical transactional data records of that property, the node is able to look into its own chain and record history to check the validity of the transaction.” Payments can also be made on the Blockchain or outside of it.
Benefits of moving mortgages to the Blockchain
The Hong Kong report highlights a number of benefits to the DLT system. It recognizes that DLT is tamper proof. They also acknowledge that it is immutable and transparent and there is a possibility of the deployment of smart contracts.
As the report concludes: “A DLT system clearly has the potential to bring new opportunities and efficiencies to the banking and payment industries, based on the key strengths set out in this chapter. These include the capability of establishing trust in a distributed system, efficiency in broadcasting information in a speedy and secure way, the ability to achieve complete traceability of records and transactions, the possibility of lowering operation costs and the potential for high resiliency.”
However, the million dollar question is still governance and regulation. It is expected that the next iteration of the report will focus on the legal aspects of Blockchain and will provide updates of the proof of concepts involved.