Introduction | Recent conveyancing frauds involving law firms | Shattered dreams

In Hong Kong, home ownership is a multi-faceted milestone, signifying a ticket to the middle class, a landmark of upward mobility, financial protection from life adversity and, in certain cases, precondition to marriage / intimate relationships. However, owing to skyrocketing housing price (which persisted despite COVID and other economic down turns), only half of the households live in their owned homes in Hong Kong. Today, most home purchases will require the entire accumulated fortune of an individual to complete.

In December 2020 when the Law Society of Hong Kong announced its intervention into the practice of a local law firm with its major business in conveyancing matters (the “Firm”), on the ground that its former clerk allegedly misappropriated clients’ money (effectively ceasing the firm’s practice), the ramification of the intervention became reality shattering for many of the Firm’s clients. Innocent purchasers who have deposited their hard-earned purchase money with the Firm ended up spending their Christmas in panic.

The difficult situation facing the purchasers was that they had already executed a binding contract to complete the sale and purchase, but their monies for the purchase were paid into the Firm’s bank account and were frozen and unavailable for use in the pending transaction due to the legal intervention. Purchasers had to source their funds elsewhere to complete the transaction or they would have their deposits forfeited by the vendors. It was even reported that some of the purchasers who engaged the Firm for their property purchase were on the edge of bankruptcy. Suffice it to say, the Firm Intervention fostered paranoia, questioning whether solicitors (who are ultimately still human) can be trusted one’s life savings in such a critical juncture.

Existing risks in the current conveyancing practices

The current conveyancing practice in Hong Kong commonly involves the following major steps:

1.         The vendor solicitors holding the deposit as stakeholder;

2.         The purchaser depositing purchase money into his/her solicitors’ client accounts; and

3.         The purchaser solicitors issuing solicitors’ cheque to the vendor solicitor.

All these procedural steps require considerable trust in lawyers and their employees. 

In fact, the case of the Firm is not an isolated incident. On 25 November 2021, the Law Society of Hong Kong intervened into the practice of 2 other firms, the principal or former employees of which are allegedly involved in a conspiracy to defraud in conveyancing transactions.

The Law Society of Hong Kong has taken a more vigilant approach towards breach of the Solicitors’ Account Rules and dishonesty of its members. Between the periods of 2011 to 2020, not less than 23 law firms have been intervened in Hong Kong. While the Law Society of Hong Kong pursues the legitimate aim of disciplining non-compliant law firms, the clients of these intervened firms are often inadvertently trapped in a helpless situation (“collateral damage”).

Building a revolutionary trustless system, perhaps?

In light of the aforementioned problems, is there any way to better protect lay clients’ interests and minimize the risks involved in the conveyancing practice? Trustless smart contracts and blockchain technology might be the answer.

What can blockchain and related new technologies do that money can’t?

As a quick recap, a blockchain is a digital log of transactions that is replicated and disseminated across the blockchain’s complete network of computer systems. It stores data in a way that it is virtually impossible to alter, hack or cheat it. 

Blockchain technology is the backbone of Polkadot (“DOT”), and for most of the cryptocurrencies. What makes DOT uniquely stand out from other cryptocurrencies is that it has a blockchain interoperability standard, which allows value and data to be transferred between previously incompatible networks such as Bitcoin and Ethereum. DOT allows users to conduct transactions simultaneously and share data without compromising security. DOT tokens, the native coins for DOT, are available on current exchanges and have a relatively high liquidity.

Can smart contracts be a game changer?
Removing the human element

These seemingly abstract concepts can be connected to the conveyancing practice with the application of smart contracts. With its unique parachain system, DOT can support a wide variety of smart contract provided by different smart contract platforms.

Smart contracts store data, run code, and automate processes on the blockchains. They can facilitate pre-programmed transactions and render blockchain procedures more efficient once they have been programmed and placed on the blockchain.

Now connecting the DOT(s): smart contracts, if better recognized, can be introduced into a conveyancing system. Instead of relying on a trust system, where solicitors are essentially trustees of a huge amount of funds (one’s life savings in many instances), now we can consider the possible application of smart contracts that allow automatic processes.

In a smart contract, only one set of trade terms exist. These terms are predefined as codes and, without need for human intervention, can execute themselves when a triggering event occurs, minimizing ambiguities about contract terms and reliance on the other party's contractual performance. At the same time, an intended recipient can, well ahead of time and in full view of the blockchain, see that the funds are there and ready to be released upon satisfaction of preconditions from their part.

This can circumvent the trust system and any complications in association to that seemingly tri-parte relationship, including the tragedies mentioned at the onset of this newsletter. In short, it is far easier to trust codes than human beings.

Potential hurdles ahead

Every coin has two sides, including the DOT coin. First, smart contracts cannot be legally reversed once they have been signed. To mitigate, the parties might agree on additional transactions to reverse the results of the void transactions, but the void transaction would remain on the blockchain of the smart contract. 

Moreover, given the relatively more conservative stance that the regulatory bodies in Hong Kong usually take, it is unclear whether smart contracts would go mainstream, particularly due to its privacy concerns in relation to the Personal Data (Privacy) Ordinance.

Yet, governments around the world are taking a more proactive attitude towards cryptocurrency and cyber technology. For instance, it was reported that Rio de Janeiro, a major Brazilian city, will allocate 1% of its treasury reserves to cryptocurrencies and offer discounts to tax payments made by cryptocurrencies. The application of cryptocurrency in the old economy is not fictional.

Key takeaways

The problems with our current conveyancing practice are widely acknowledged. Recently, the Hong Kong Monetary Authority published a proposal to reform the payment arrangements for property transactions, but the proposal also comes with downsides such as risks of delay, high administrative costs and lack of flexibility. With the advent of technology, the application of blockchain, cryptocurrency and smart contracts can potentially step in and revolutionize the system. For more information in respect of applying the DOT and other smart contract solutions in your transactions, contact your technology lawyer today.