Consulting on structuring, tokenization and optimization of investment portfolios using blockchain technology

Real estate tokenization is an unconventional investment vehicle with advantages for both issuers and investors. The real estate sector now accounts for around 40% of the digital stock market.

Real estate tokenization converts the value of real estate into a token stored on a blockchain, enabling digital ownership and transfer. Each of these divisible tokens features a fractional share of the ownership interest in that real estate. This article explores the emerging trend of real estate tokenization, as well as its main benefits and potential to revolutionize the real estate investment market.
Real estate tokenization is the process of fractionating real estate into tokens stored in a decentralized database.
This decentralized database stores information like a digital ledger and is commonly known as a blockchain. The distributed ledgers in which the real estate tokens are captured are validated by the blockchain network, synchronized and shared with all network participants almost instantly, permanently recording an accurate record of transactions generally accessible to the public.

Real estate tokens are similar to non-fungible tokens (NFTs), which are non-exchangeable units of data stored on a blockchain that can be sold and traded, with the exception that real estate tokens are generally pegged to the value of an asset. physical. A real estate token can represent:

Ownership of part of a property
Ownership of all real estate
An equity interest in an entity that controls real estate
An interest in a debt secured by real property, or
A right to participate in the profits generated by real estate
Real estate tokens can also be differentiated from real estate investment trusts (REITs) as they allow specific investment tied to a particular real estate property, while REITs generally facilitate investment in groups of various real estate assets.

Digital tokens are created and issued on a blockchain during a security token offering (STO), also known as a tokenized security offering or tokenized asset offering. Each fraction of ownership is converted into a token and then encrypted to grant ownership. Ownership can then be transferred directly from one investor to another on digital stock markets using alternative trading systems (ATS) almost instantly for a relatively low fee.

Benefits of real estate tokenization
I. Lower barrier to entry
By making it easier to invest in fractional portions of real estate, real estate tokenization enables small-scale investors to participate and lowers barriers to entry for retail investors. Therefore, lower minimums and smaller investment amounts can be taken advantage of to benefit from the high potential returns available for traditional real estate investments, which typically require significantly more initial capital.

II. Ability to create liquidity.
Real estate tokens can be easily and securely transferred using blockchain technology, allowing investors to diversify their portfolios, minimize risk and create liquidity in the real estate market. Rather, issuers have access to a broader pool of investors.

III Lower transaction costs
Through automated processes and a permanent, unalterable digital ledger, blockchain technology has the potential to streamline investment transactions and reduce transaction costs. As a result, investment transactions are typically completed faster and at lower cost to the parties involved, facilitating higher returns for the investor. Tokenization also brings a number of other benefits, such as real-time capitalization table tracking, better accessibility, and greater transparency for potential investors.

Key considerations regarding real estate tokenization
I. Implications of securities law
Generally, real estate tokenization will be considered a security, but an analysis of each specific token should be considered from the outset. If the token is a security, the issuance of such token will be subject to any applicable prospectus requirements or reliance on an exemption, such as the "accredited investor" exemption.

In addition to the prospectus requirements, the issuer must consider the applicable registration requirements.

II. Reconciliation with the cadastre
The tokenization of assets s estate requires reconciling the applicable transaction with current land registration systems.

The future of real estate tokenization
Tokenization provides a convenient and inexpensive method of investing in real estate assets, but as a relatively new investment vehicle, regulators have yet to establish a consistent framework of rules governing real estate tokenization.

The nature of the asset being tokenized affects which regulatory frameworks will apply. Additionally, market confusion and knowledge gaps present challenges that must be overcome before real estate tokenization can be widely adopted.

Real estate tokenization has the potential to transform real estate investing by increasing liquidity in a largely illiquid asset class, lowering barriers to entry for retail investors, and lowering transaction costs, but issues such as clear regulation of the market, reconciliation with property title registries and the need for centralized reporting of transactions presently present problems for market participants.

Real estate investors and owners interested in capitalizing on the real estate tokenization trend should seek the advice of experts, including legal, financial, and real estate professionals.

Note for Michael C. DeCosimo and Colton Riley.