Blockchain technology allows for a shared ledger to track transactions. It has seen quite a lot of growth and adoption, such as from mega companies like IBM (NYSE:IBM). Keep in mind that the use cases are extensive. For example, blockchain technology is starting to be used for such things as real estate asset tokenization.
“Real estate tokenization refers to securitizing a real estate asset by issuing a digital token on the blockchain, representing ownership or an economic interest in the real estate asset,” said Jesse Stein, who is the co-head of Republic Real Estate.
“The purpose of tokenization is to create efficiencies in securitization, capital markets, and shareholder management. There are a ton of innovative companies within the tokenization ecosystem looking to overhaul every part of the securitization process by using blockchain technology,” he said. “The goal for these companies is to offer services that produce superior investment products with greater access, transparency, and liquidity, which are challenges that the investment industry has consistently tried to solve for.”
True, an effective way to get exposure is with investments in real estate investment trusts. They provide diversification, liquidity and consistent dividend payments.
But if you are interested in ownership of an individual property – especially a high-end one — then you usually need to be a wealthy investor or institution. Current financial structures are not practical with having a large number of investors.
However, this is not the case with real estate asset tokenization. This approach is ideal for structuring complex transactions.
Let’s take a deeper look at the advantages:
- Transparency: Blockchain efficiently records data and makes it visible to all parties. But interestingly enough, it cannot be changed. Thus, the blockchain technology provides for a high-level of security.
- Fractionalization: Ownership of a property can be divided into minute segments. It could, for example, be units that fetch only a few hundred dollars. This means that real estate investments can be scaled across a large number of investors across the world. At the same time, the developer of the property can use fractionalization for gaining access to capital for new projects.
- Low costs: A real estate investment generally has a myriad of fees, such as for brokers, escrow companies, lawyers and so on. But a blockchain-based contract can minimize the expenses because of the recordkeeping and automation of workflows.
- Liquidity: This is a big issue with traditional real estate investing. But blockchain helps to solve the problem. “Tokenization allows quick exchange, resell of tokens anytime, rapid settlement, as markets are open 24/7,” said Anna Tutova, who is the CEO of Coinstelegram.
The Bottom Line For Real Estate Asset Tokenization
Of course, real estate asset tokenization is not without its drawback. For example, there are the inherent risks of a cyber breach. Then there are the problems with the conflicting tax implications.
But perhaps the biggest problem is the regulatory situation. It’s common for tokenization deals to fail to get off the ground because of compliance concerns.
Yet despite all this, the future of this approach still looks promising, Stein says.
“What excites me most is that tokenization has been a catalyst for some great ideas on what the future of securitization might look like. It has forced the industry, as well as regulators, to take notice of what investors truly want. Tokenization is another step toward the future of investing, which will embody the exact ideals that tokenization strives for—access, transparency, and liquidity. As we look to build a more inclusive investment landscape, the underlying technology used to get there should be irrelevant. The fine lines between public and private, accredited and non-accredited, foreign and domestic will begin to disappear, creating a new paradigm for investing — for everyone.”
Tom Taulli (@ttaulli) is an advisor and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
