Click here for PDF
Tokenization is the process of representing fractional ownership interest in an asset with a blockchain-based token. A blockchain is essentially a distributed database of records, or public ledger of all transactions or digital events that have been executed and shared among participating parties. Each transaction in the public ledger is verified by consensus of a majority of the participants in the system.1 In the context of real estate, tokenization allows individuals and entities to own a fraction of a real estate asset using a secure and verifiable protocol—a process that was impossible prior to blockchain technology.
Perhaps one of the greatest benefits of tokenization is its ability to bring liquidity to assets that are illiquid or otherwise nontransferable. While liquidity may be defined in various manners, in general, liquidity is the degree to which an asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value. By its very nature, real estate assets are illiquid due to a number of factors, such as difficulty of transacting and access to capital. Blockchain has the potential to address the issue of liquidity. For example, a U.S. dollar can only be broken down to $0.01, but tokens can have up to 18 decimals. This newly created system increases the amount of potential liquidity in the market. Unlike before, this permits individuals and entities from different geographic and financial backgrounds to invest in a basket of real estate assets that perhaps were once too expensive.
The use of blockchain-based smart contracts similarly has the potential to improve the speed and efficiency with respect to real estate transactions.2 Unlike a standard contract that outlines the terms and conditions of a relationship—often governed and enforced by law—“smart contracts” enforce a relationship with cryptographic code. Smart contracts have the ability to function as multi-signature accounts so that funds are only spent when a certain number of people come to a consensus, provide utility to other contracts, and store information about an application similar to membership records.3
Currently, a real estate transaction involves many participants, including buyers, sellers, brokers and banks. A blockchain-based smart contract eliminates the need for intermediaries and expedites the overall process. For example, the seller may upload all of the details of the real estate asset and the buyer puts all of their information on a 100% encrypted and secure block. The blockchain protocol will verify the information by both parties and facilitate the transaction without an intermediary. In sum, real estate transactions based on smart contracts offer substantial benefits unseen before, such as:
- Enhance speed of transactions
- Reduce overall real estate costs
- Eliminate intermediaries and middlemen
- Substantially reduce fraudulent conduct stemming from forged documents
St. Regis Aspen Resort
In October 2018, owners of the St. Regis Aspen Resort in Colorado became one of the first major real estate properties in the U.S. to sell real estate security tokens. The sell raised $18 million via Indiegogo, which was able to list the Aspen Coin through a partnership with Templum Markets LLC, a FINRA and SEC-registered operator. Each Aspen coin was sold at $1 and investors were required to purchase at least 10,000 coins.4 In June 2019, the AnnA Villa in Paris, France was tokenized in a €6.5 million transaction deal. The purchase was facilitated by Equisafe and tokenized using the Ethereum blockchain. Similar to the St. Regis deal, tokens were broken down and divided to smaller units so individual shares of the building could be purchased and traded via secondary market platforms at €6.50 per token.5
Most recently, on July 23, 2019, the Fundament Group, based in Berlin, Germany received approval from the German Financial Market Supervisory Authority to issue the nation’s first tokenized bond backed by German real estate.6 The real estate portfolio will include residential, commercial, and hotel properties that when complete will amount to over 680,000 square feet real estate property. The real estate token—issued on the Ethereum blockchain—is valued at 250 million euros. More importantly, however, the company expects to pay investors an annual dividend between 4% to 7% until 2033. By this point, investors will be reimbursed in full for the nominal amount of their initial purchase. These types of transactions will continue to increase as buyers and sellers recognize the benefits of tokenizing real estate assets.
Blockchain technology has the potential to revolutionize the real estate industry and create opportunities that were once unthinkable. The tokenization of real estate assets will increase liquidity in the market and create a more cost-effective and efficient marketplace. As blockchain continues to attract interest from all sectors, the real estate industry is in a position to reap many of its benefits. Undoubtedly, institutions and investors alike are seeing the benefits of tokenization. As the presence and usage of blockchain technology continues to grow, the real estate industry will continue to see properties tokenized and sold on secondary markets—allowing individuals to own property interests in real estate that once was impossible.
1.See “BlockChain Technology: Beyond Bitcoin” here for further information about blockchain fundamentals.
2. Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code.
3. See How Do Ethereum Smart Contracts Work? here to learn more about the benefits of smart contracts.
4. See St. Regis Aspen Resort Raises $18 Million via Security Token Offering here.
5. See Equisafe Completes First Ever Real Estate Sale Tokenized on Ethereum here.
6. See $280 Million Ethereum Real Estate Bond Seeks to Recapture the Promise of the ICO here.