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Blockchain technology is a digitized and distributed ledger that immutably records and shares information using software protocols and advanced cryptography. The development of blockchain-based smart contracts – self-executing software algorithms integrated into a blockchain with activation actions based on predefined parameters – has allowed parties to automate the process of executing commercial transactions between counterparties in a more direct and reliable and efficient way.
Tokenization is the process of representing a fractional ownership interest in an asset with a blockchain-based digital token. Each token represents direct ownership of an asset, such as a lot of real estate, a share of a company that owns a property, a stake in a real estate investment trust, payment rights related to the property (such as dividends, distributions, or a share of profits) or any number of potential derivatives. Amid the growing interest in technology applications for real estate assets, or “Proptech,” the industry recognizes that tokenization has the potential to revolutionize real estate transactions and disrupt established business models.
Real estate tokenization
Property tokenization generally follows a five-part procedure by the bidder:
- Resource identification—Identification of the commercial real estate, which may involve its acquisition, financing and valuation;
- Generation of smart contracts– Compliance with securities laws and creation of a smart contract;
- Token creation—Determination of the number and type of tokens and selection of an exchange platform;
- Marketing and distribution– Publicity of the offer, confirmation of the investor’s accreditation and listing of the tokens on the stock exchange through an offer of security tokens (STO); is
- Post-insertion support—Supporting investors and distributing profits or other payment rights.
Tokenization, by reducing or eliminating intermediary costs and lowering minimum investment requirements, offers the potential to unlock trillions of dollars in illiquid global real estate assets for retail and institutional investors in an open market.
Barriers to marketing
Regulatory uncertainty continues to be the most significant obstacle to the tokenization of real estate assets. Security regulations vary significantly from jurisdiction to jurisdiction and can broadly apply not only to the creation and initial offering of tokens, but also to trading on secondary markets. Furthermore, there is currently no international regulatory framework.
Several technical challenges to tokenization adoption also remain unresolved. Cyber security and the risk of hacking have plagued the launch of the cryptocurrency since its inception. Furthermore, as tokenization remains a nascent technology with little public awareness, stakeholders have just begun to develop the exchange platforms, custodianship services, user communities, and most importantly, the political and institutional support needed to deliver the advantages of this technology.
Recent developments
On July 5, 2017, BNP Paribas Securities Services announced the creation of a platform that allows private companies to issue securities through blockchain technology. This platform can record commercial real estate and other transactions in primary and secondary markets around the world and serve issuers, shareholders, investors, lawyers, notaries, accountants, banks and crowdfunding platforms. On 7 October 2020, BNP, in partnership with Curv, a cloud-based digital asset security infrastructure for financial institutions, announced the successful completion of a proof of concept to securely transfer security tokens between participants market.
Ubitquity LLC has been offering a “Blockchain-as-a-Service (BaaS) platform since September 2018 to allow users to securely register and monitor properties”. It provides proprietary companies, municipalities and custom customers with a clean ownership record through the blockchain. Transactional information is automatically recorded on a blockchain that is interoperable with UTXO blockchains based on unspent transaction output (UTXO), including Bitcoin, Ethereum, Hyperledger and MultiChain. Ubiquity estimates annual cost savings of nearly $ 4 billion from error reduction, $ 550 million from legal claims and $ 3 billion from loss for claims. On October 20, 2020, Ubitquity announced that it has begun offering tokenization management solutions for real estate, property and other companies using a FINMA-approved platform for tokenization, including the ability to assist with regulatory compliant token sales. Americans.
On July 12, 2020, the Public Private Execution Network (PPEX), an alternative trading system (ATS) for exempt digital assets and other private securities, announced the successful completion of its SEC registration. PPEX offers users the ability to trade exempt digital assets and other private securities from the protection of a regulated platform, allowing users to trade peer-to-peer tokenized securities. This development demonstrates further competition in the industry, as well as a more responsive approach by SEC regulators to the blockchain space.
In November 2018, New York-based Factora was the first company to tokenize a lot of real estate in Manhattan, consisting of a 12-unit East Village luxury condo with a total estimated value of $ 36 million. . In August 2019, Smartlands, the UK’s first regulated blockchain-based crowdfunding company, became the first company to tokenize a UK-based property by successfully closing an STO involving a 12-person student housing complex. 06 million pounds in Nottingham, UK.
On February 27, 2020, Red Swan, in partnership with the Polymath tokenization platform, announced that it has tokenized over $ 2.2 billion in real estate assets. The tokens issued represent 16 properties, including mid- and high-rise apartments in California, New York and Texas, and a 150-acre hemp farm in the Canadian province of Ontario. Red Swan indicated that it has 30,000 accredited investors registered to use its platform, plans to tokenize an additional $ 4 billion in ownership, and will profit by keeping a percentage of the capital sold.
On 8 July 2020, Hamburg-based KlickOwn AG announced that it has successfully completed an initial offering of € 1.5 million bonds for the “Historisches Lüneburg” property, based in Lüneburg, Germany, conducted exclusively via tokenization using the Munich custody service Bankhaus von der Heydt for the custody of investor tokens.
On August 30, 2020, MountX Real Estate Capital announced it had licensed the Vertalo platform to design and launch over 15 digital real estate projects in Mexico and Canada in 2020 and early 2021. On November 7, 2020, they announced completion of the first successful tokenization of real estate in Mexico to date, including two apartments in Queretaro, Mexico, for a total price of $ 5.2 million pesos.
On September 10, 2020, REINNO, a Connecticut-based company, announced the launch of a market for tokenized commercial real estate, including five offers worth more than $ 237 million available to accredited investors worldwide. Finally, on 5 October 2020, WeInvest Capital Partners announced that it has selected Tokeny Solutions to tokenize the first real estate fund in Luxembourg.
Conclusion
The commercial real estate sector has yet to realize the potential of blockchain-based tokenization and the ways it can be applied to address existing market inefficiencies. However, momentum is building as this technology and its application to real estate transactions are better understood.
