Blockchain gets down and dirty fighting fraud at California’s DMV

In the United States, dealing with the Department of Motor Vehicles, or DMV, is no one’s idea of fun, but in California, it just got easier — and safer.

In one fell swoop, the Golden State tokenized 42 million car titles and put them on the Avalanche blockchain.

Californians will no longer need to wait in lines at the local DMV to transfer car titles to their names. Instead, they can claim their vehicle titles through a mobile app.

The new technology may also provide an early warning system for lien fraud, according to the project’s partners, because its core function is “an immutable ledger that bad actors cannot manipulate.”

This is just the sort of use case that many of blockchain’s adherents have been demanding for years.

Mark Cuban posted on X on July 30:

Joe Ciccolo, president of the California Blockchain Advocacy Coalition, called it “a real-world example of a service that could be streamlined and enhanced to benefit Californians in their everyday lives.”

Ciccolo told Cointelegraph that not only will it reduce the need for excessive paperwork that can be easily lost or forged, but it also means that once a car title and its associated liens are recorded on the blockchain, “they cannot be changed or tampered with — reducing the risk of fraudulent changes.”

The current implementation is an outgrowth of a “Blockchain Executive Order” signed by California Governor Gavin Newsom in May 2022 to spur Web3 innovation and “protect consumers” in the state. Its three main partners are the California Department of Motor Vehicles, tech firm Oxhead Alpha, and Ava Labs, which launched the Avalanche blockchain in 2020.

A “significant development” for the blockchain industry

The California project isn’t the world’s first blockchain-based property transfer protocol by any means, but it could become one of the most impactful, given its scale and prominence.

“This is a significant development for the broader blockchain space to the extent that it is the first time we have seen a major economic center in the US especially roll out a blockchain-based system,” independent research consultant James McKay told Cointelegraph.

“The scale of this project is what stands out to me as it’s significantly higher from a volume standpoint than other initiatives rolled out for land registry and other related areas, like Sweden’s ‘Lantmäteriet’ blockchain system,” McKay added.

Could it really reduce lien fraud, which happens when car sellers falsely claim a lien has been released?

“Here, in theory, inscribing everything onto a blockchain would ensure that all transactions and changes to records are transparent and verifiable,” said McKay.

Of course, he added, you don’t necessarily need a blockchain for that. You just need an app that flags whether the vehicle is linked to a loan or some other claim.

“The blockchain element is of greater importance when it comes to securely linking said information about a vehicle with a centralized database containing personal information — in this case, the DMV,” McKay noted.

Oxhead Alpha’s president, Andrew Smith, told Cointelegraph in a 2023 interview that car owners sometimes will try to hide key vehicle problems, like faulty transmissions, from unsuspecting customers.

It’s been harder to do this in California because the state has a special designation on car titles for flawed vehicles known as “lemons.” But fraudsters have been able to move their vehicles to other states and hide those designations, explained Smith.

This will be less easy to do with blockchain recording systems, particularly if other states follow California’s lead.

However, the technology is unlikely to eliminate fraud entirely. While blockchain “is a great mechanism for provenance and trust,” it is only as credible as the data inscribed upon it, Ali Shahaab, lecturer in data science at the Cardiff School of Technologies, told Cointelegraph, adding:

“There are numerous examples of false data added to these append-only ledgers. Therefore, it is of high importance that thoroughly vetted data is added to the public blockchains.”

Will other states follow?

“The ability to transfer the title of a car via the blockchain in tokenized form would make it near instant to verify if the seller of the vehicle is the true owner before the transaction is processed without any delays or risks,” Sushen Talwar, head of finance at Zora Labs — a non-fungible token marketplace — told Cointelegraph this week.

Talwar added that this should help out with primary sales, i.e., from dealers directly, as well as secondary sales, when one person sells to another individual on their own.

However, as suggested above, the initiative might not be fully efficacious until other US states follow suit. “Currently, only the state of California has agreed to the tokenized titles,” added Talwar, “however I would assume, based on how this pilot works, it can be implemented across multiple states and perhaps federally.”

California has more registered motor vehicles than any other state, and it is also considered a trendsetter within the United States, “so a pilot at this scale can influence new policies to further help and avoid fraud,” said Talwar.

McKay agreed that the fact that this is unfolding in California is significant. It “not only creates a bigger splash, but it’s also a more credible template for other major economic centers in the US to follow.”

Others were more measured. “Though it is a great use case and an excellent initiative, I doubt it will create any widespread adoption,” said Shahaab. “We will have to wait and see how this project plays out and what kind of actual benefits it brings.”

“Not a new phenomenon”

State actors aren’t new to blockchain, either. “Governments around the world have been trialing blockchain-based systems for many years,” observes McKay.

Switzerland, for instance, piloted a blockchain-based system to simplify and expedite the business registration process in 2021, he notes. “These initiatives are not a new phenomenon in other parts of the world.”

Naseem Naqvi, founder and president of the British Blockchain Association, told Cointelegraph that many research papers have been published exploring the utility of blockchain technology in transportation infrastructure. The potential scope of projects goes beyond title transfer.

“We can tokenize and decentralize automated fare collection, build fair subsidy compensation mechanisms, streamline proof of location within a trusted execution environment with onchain smart contracts, and automate fine and penalty payments.”

Others have explored driver’s license management using zero-knowledge proofs for self-sovereign identity, he added.

Overall, Naqvi called the California initiative a “welcome development” because it will enhance trust and transparency in social contracts and business processes.

“Procurement fraud, just in the UK alone, costs a whopping 127 billion British pounds every year to the British economy — equating to more than 4,000 pounds lost per second, every day,” he told Cointelegraph.

A springboard for blockchain adoption?

Some related areas, like real estate property transactions, have proven more difficult to tokenize on a blockchain, noted Government Blockchain Association executive director Gerard Dache, even though “using blockchain in real estate property transactions would streamline costs and have enormous benefits.”

But, such transactions are “enormously complex,” with numerous stakeholders, contracts, laws and regulations. That complexity has proven a barrier to adoption, Dache told Cointelegraph.

“Property transfers like vehicles are similar to real estate transactions, but they are far less complex,” Dache added. For that reason, they can be seen as a kind of “steppingstone” for these more complex implementations — another reason the California car title experiment bears watching.

Nor is it just the scale of California’s tokenization project that impresses Dache. “There are many blockchain architectures that allow for large-scale implementation.” What is different here, in his view, is the paradigm.

“Currently we rely on large, centralized government databases, offices, and people to tell us who owns what property.”

The idea that the authority shifts from a government office to a decentralized system that is owned and operated by a community of stakeholders “is a shift from government to governance,” said Dache. “It is a huge step forward in transforming the very idea of government and governance.”

“It once again raises the question of how permissioned blockchains could be deployed in public and private spheres around complex systems,” added McKay.

“This is a very positive step, and I particularly appreciate that this was done on an Ethereum Virtual Machine-compatible public chain,” Paul Brody, EY Global Blockchain Leader, told Cointelegraph. He added:

“That’s a solid foundation for future transactions and services.”

“Far too many prior efforts in areas like this have ‘notarized’ documents,” noted Brody, “but people don’t buy and sell documents, they are buying the asset represented by the document, and that should, natively, be a token.”

When asked if tokenizing car titles on an Avalanche blockchain can really fight fraud, Naqvi said: “Blockchain is an anti-corruption, anti-fraud, governance technology,” and the tokenization of contracts, as California is doing here, “can mitigate public procurement fraud, build transparency, and improve integrity among government departments, public services, citizens and enterprises.”