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The concept of tokenized real estate assets, which are effectively digital shares of properties that be launched and monitored on blockchain networks, has been around for a few years, but tokenization as a technique of raising finance hasn’t yet made it into the mainstream of the commercial real estate market.   Alternative trading platforms and digital shares (tokens) are being used by certain real estate enterprises in partnership with established fintech providers to facilitate their offers and investor liquidity.   Creating the option of tokenization is really the frosting on the cake.  It provides the investor with complete choice over when and how much of their share they sell while maintaining the stability of a typical real estate transaction.

What Are the Advantages of Tokenization?

For the great majority of real estate investments to be profitable, investors must commit to holding their investment for the duration of the project’s lifespan, with profits realized only when the sponsor decides to refinance or sell the property.   A secondary market transaction, such as selling shares on a stock exchange or through an alternative trading system, allows investors to realize their investment sooner and at a higher price than they would otherwise be able to (ATS).

Less Expensive and Highly Effective

In contrast, the traditional secondary market is inefficient and expensive, with a large number of brokers, transfer agents, custodians, and service providers collecting fees and running processes.   As a result, settlements take at least three days to complete, incur high transaction costs, and provide limited real-time pricing information, and those markets are only useful for very large publicly-traded REITs.   In this scenario, blockchain technology gives a technological edge. It is possible to streamline and automate the process of issuing and trading shares in blockchain form (tokens), so removing the need for many of the expensive service providers and boosting transaction speed, security, and pricing transparency.   Fintech companies are launching tokenization platforms to enable investors to efficiently buy and sell tokens on the secondary market.

More Power for Investors

Fintech companies are launching tokenization platforms to enable investors to efficiently buy and sell tokens on the secondary market.  Tokenization and the use of ATS marketplaces can provide investors with greater power over their investments.

What is the procedure for tokenization?

As part of a capital-raising effort for a real estate project, a sponsor may issue shares in token form or may choose to convert shares into tokens at a later date. They may also provide investors with the option of exchanging their shares for tokens in an upstream company.   The first investment procedure for a crowdfunded real estate project that includes tokenization is identical to the process for a deal that does not include tokenization. An investor will not be able to tell the difference right away.   Sponsors may then take the necessary regulatory measures to permit private, or public trading of the tokens, or they may offer investors the option of exchanging their shares for tokens issued by another business that has completed the necessary legal processes.

Same Economic Rights in Digital Form

The token is just a digital share that carries the same economic rights as any other share in the same company or organization.   Once an investor’s stake has been tokenized, the tokens are stored digitally on a blockchain and may be traded on secondary markets using the ATSs. Investors can then decide whether or not to sell all or a portion of their investment at any time.   They can also choose to keep their tokens for the duration of the investment hold period, and they will continue to receive their part of distributions throughout the investment’s lifespan, just as they would with a traditional piece of stock.

What is the difference between digital shares and Bitcoin?

The blockchain technology that underpins unregulated cryptocurrencies such as Bitcoin and Ethereum is used to enable payments and transactions, and they are not typically considered securities by the Securities and Exchange Commission (SEC) (SEC).   Digital shares issued by sponsors on the CrowdStreet marketplace, on the other hand, are regulated securities and, as a result, provide investors with investor protections, despite the fact that the tokens themselves are housed on a blockchain ledger.

Bitcoin is Pseudo-anonymous

Unlike Bitcoin and Ethereum, which are pseudo-anonymous and may be held by anybody, digital securities are only authorized to be stored and transferred to parties that have passed thorough KYC/AML checks to guarantee that they are eligible for holding and transferring them.   The trading of unregulated cryptocurrencies such as Ethereum and Bitcoin takes place on cryptocurrency exchanges that are not approved by the Securities and Exchange Commission or the Financial Industry Regulatory Authority (FINRA).

Subject to Different Laws

Tokenized digital shares are subject to U.S. securities laws, tokenized digital shares and the ATSs that trade them are subject to securities laws in the United States, including the oversight and approval of the SEC, FINRA, and other state and federal agencies, anti-money laundering rules, and other laws, just as are tokenized digital shares.   The same is true for the companies that issue the tokens, who rely on transfer agents to properly establish the identity of the token holders. However, in an ironic twist, the same technology that provides pseudo-anonymity for bitcoin is also very suitable for ensuring transparency of ownership and safe transactions for digital shares.

To summarise, tokenization is a good thing

More companies will likely experiment with tokenization and secondary trading in the next years, according to our predictions for the next several years.   Although it is a new concept, giving investors the option to tokenize and sell their share of a real estate deal is unlikely to become the norm in the near future.   This is because tokenization is a new concept, there is no single roadmap for setting up a tokenization option, and the majority of commercial real estate firms are still figuring out how to go about it.   The success of secondary trading marketplaces will be determined by the level of demand. Investors that take advantage of tokenized agreements from early adopters may spur other sponsors to follow suit, resulting in a more simplified process for tokenization in the long run.  
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