Bitcoin has introduced a brave new world when it comes to digitizing currency. It has spawned an entirely new class of assets collectively known as cryptocurrency. Today there are hundreds of cryptocurrency, but none as attractive or valuable as Bitcoin.
While Bitcoin is and cryptocurrency have created a tremendous amount of enthusiasm in the crypto universe—it continues to remain volatile to this day. For the more conservative investor, less volatile options are desired.
Real estate has always been considered a sure bet. While there are occasional downturns in owing real estate, they are always corrected and property value continues to appreciate. With blockchain, real estate is now being tokenized as a new asset with few favorable features for the investor.
What is a Tokenization of Real Estate?
The basic token is represented by programmed assets or access rights, and are managed by a smart contract and the underlying distributed ledger. According to Asha Dakshinamoorthy—“real estate tokenization is the process of creating a digital asset that represents a single property or a portfolio of properties on a blockchain-based system.”
Jimin Won elaborates: “Tokenizing is the process of creating a fractional ownership interest on an asset (utility or security) with a token that is blockchain based.”
Blockchain, using distributed ledger technology, maintains a database of records. This is a “public ledger of all transactions or digital events that have been executed and shared among participating parties,” says Won.
All transactions in the public ledger are verified and validated by “consensus of a majority” in the ecosystem. The data is immutable—once data is added to the blockchain, it cannot be deleted, altered, or erased. As the world in the 21st century moves toward a digital economy—it’s not surprising to see that one of the most prized assets, real estate, is also moving toward a digital asset. And tokenization is leading the way.
As we continue to move to a digital economy—both financial and physical assets will “increasingly have digital representations of their unique value.” Blockchain will play a significant part in this economy. According to Won, the World Economic Forum predicts blockchains will account for 10% of the world’s GDP by 2025.
In addition to fractional ownership of an asset—tokenization can create liquidity for the investor. Ownership of traditional real estate requires one to “lock in their capital” for an extended period of time. However, with tokenization—the shares in a real estate project can will become more liquid—thereby creating access to global capital.
With traditional exchanges, access to the asset is limited to regional investors during local open hours. However, tokens can be traded any time, and across borders.
Tokenizing Your Real Estate
Writing for Alpha Point, Asha Dakshinamoorthy explains how to digitize real estate. ere are three phases to tokenize your real estate project: Deal structuring, technology selections, and token creation and distribution
#RealEstate Tokens are coming to @tezos – the trending self-amending cryptographic ledger. @AlphaPointLive and @ElevatedReturns are partnering to build a white label, full-stack digital real estate exchange atop Tezos' blockchain.
— PropertyHeadlines (@PropHeadlines) June 25, 2019
In this phase, the asset owners will need to select a specific property or properties to digitize and then set up the Legal structure—since digitization of real estate “requires a legal wrapper around the individual property(ies).”
The structure will specify how the property is held, type of fund, and whether project is a Real Estate Investment Trust (REIT). The structure will need to define Shareholder rights, Investor types, and Execution regulation.
Next, once a legal structure has been set up and the deal structure is underway—it’s now time to make a few technology decisions.
Blockchain / Token Definition. Select the blockchain to create the token.
Custody. Determine a physical custody solution that can suitably store real estate tokens. Investors may also need a custody solution.
KYC / AML. Determine a KYC / AML vendor that can integrate with the primary issuance platform and the digitized security infrastructure.
Primary / Secondary Marketplace. Where do you want these digitized securities to be offered to investors for the primary issuance?
Token Creation & Distribution
Lastly—now that the technology decision have been made and are being implemented—its time now to launch the token and distribute it to investors.
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Investing in real estate is taking on an entirely new approach—making it easier for the non-institutional investor to be able to play a part in large institutional real estate projects. For the investor the ability to have liquidity makes the investor more nimble and provides them the opportunity to move with the market in a more timely fashion.