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The real estate industry has always included some form of intricacies in all of its aspects – whether you were just assessing it or looking to invest in a property.
A myriad of challenges stand in its way to become the next big thing – regulatory affairs, legal hoops required jumping through, stakeholders archaic rules, erratic transaction fees, lack of transparency, fluctuating prices, a plethora of pitfalls that lead to additional fees, and so on.
However, if we play our cards right, these derailing dysfunctions could soon be a thing of the past. More and more experts are entertaining the notion of introducing blockchain technology and tokenization to the real estate market, which could send the entire sector into a spiral that would be nothing short of a genuine revolution.
And, as the remainder of this text will demonstrate, real estate tokenization could cause precisely the type of reform needed to both streamline this market and improve the way it functions by leaps and bounds.
First Things First – What Is Real Estate Tokenization?
So, what makes us so confident that blockchain technology and real estate are a match made in heaven? Well, while we’ll get more in-depth into it as the text unfolds, here’s a quick rundown of the key qualities blockchain implementation brings to the table: irrevocable documentation of the processes, impeccable transparency, traceability, accessibility, enhanced security and cost reduction of processes.
The real estate market would experience a notable improvement if it obtained even just one or two of these qualities – well, tokenizing the real estate market would allow all of these features to take hold within the sector. This brings us to our second introductory question – what do we exactly mean by real estate tokenization?
Tokenization is the process of signifying a fractional ownership interest in an asset with a blockchain-based token. Whoever owns the token, which is something exclusively determined by the knowledge of a private key, owns a piece of whatever asset is associated with the token.
Real estate tokenization, therefore, would be the process of signifying an ownership interest in a piece of real estate property with a digital token.
Issuing, managing and exchanging these tokens would all be facilitated by a blockchain-based network, which would allow the entire system to enjoy the aforementioned benefits essential to the technology of distributed ledgers. What’s more, if tokenization is implemented the way we describe here, the property owners would emerge as the ones with the most control over the assets they possess, much in the same way cryptocurrencies empowered users to take control over their finances.
Exciting Benefits Real Estate Tokenization Brings to the Table
While it may appear at first glance like not much would change, the simple tilt in favor of asset owner’s power would drastically alter the way the real estate market operates. Let us show you how by explaining the main upsides of introducing tokenization to the real estate market.
Improved Asset Management
Thanks to smart contracts and the self-regulated logic they provide, a system with real estate tokenization would make managing one’s assets a lot more straightforward than what the case is right now.
Want to buy an asset share? Simply buy a token through the platform and that’s about it. The same goes for deciding to sell a token. There would be no traditional middleman to slow down the process, no procedures that get dragged out because of paperwork. Even things more complex than purchasing and selling assets would be simplified, such as voting. In case that, for example, an asset that has several owners receives an offer and they have to vote on whether to accept it or not.
This is the bottom line – no matter what the owners desired to do with their properties, the course of action would be drastically more streamlined. And in case you think legal regulations could be a potential pitfall here, don’t worry – tokens can easily be created to have built-in compliance depending on factors like the region in which the property is located, buyer’s history or the asset type.
Irrefutable Proof of Ownership
Blockchain’s immutability is a significant reason why real estate tokenization holds as much promise as it does. The digital history of transactions held in the blockchain ledger would help stakeholders and investors prove their ownership beyond any doubt.
What’s more, such a structure would reduce room for fraud attempts. Users would not be able to sell someone else’s tokens as blockchain would not allow access to it without providing the correct private key. And if an asset owner tried to sell a certain token several times with hopes of conning the system, blockchain would show the exact history of ownership and make it impossible for someone to falsify transactions and trick investors.
Drastically Lower Entry Barriers
It’s hardly a secret that the real estate investment is a game almost exclusively reserved for the rich. However, with real estate tokenization, we’d significantly increase opportunities for ordinary people to start investing in real estate assets if they wanted to do so.
While investing something like $700 to $1,000 in a multi-million project would literally do more harm than good when you consider all the legal hoopla needed to make it official, providing such a miniature investment to a token-funded project would be totally viable as the system would rely on the automatic execution of smart contracts.
This means that becoming a fractional owner would be a much more realistic option for the average Joe and Jane, even if all they wanted to invest was in the ballpark of a few hundred dollars.
Improved Market Security and Transparency
All systems running on a blockchain have a few things in common, but most notably, they offer the best security the digital world can currently offer.
Cryptographic encryption would protect the tokens representing the assets, meaning that the only way to gain access to them would be through the aforementioned use of private keys, something only the token owners would have in possession.
Another notable improvement real estate tokenization would provide us with is much better market transparency, something the real estate sector has been lacking for a very long time. The blockchain ledger would track the history of every single token, meaning that the conditions of every time it exchanged digital hands in the past would be a thing of public knowledge. Investors would be able to investigate past dealings and figure out if the asking price is realistic or not, leaving almost no room for unintentional over or underpaying.
Practical and Legal Issues That Need to Be Tackled Before We Start Seeing Mass Adoption
There’s obviously a reason why full-blown real estate tokenization has yet to be realized. Sure, like with most other blockchain disruptive use cases, some attempts at it were made in recent years, but we’re still considerably far away from mass adoption.
Unlike what was done with cryptocurrencies, it’s impossible to just invent a type of real estate asset that exists outside of the law’s current reach. Real estate properties can not exist solely in the digital realm. They need to be a part of the physical world, which means that any attempt at real estate tokenization would have to take government regulations into account, at least to some extent.
This brings on a surplus of different problems as legal questions start piling up from all sides. What does the token truly represent – shares in a special purpose vehicle that owns the real estate? Or a right to cash flow from a property? Have the know-your-customer and anti-money-laundering laws been taken into account? What about taxes, how do they work in this new arrangement? Are they also tokenized or do they get settled off-chain? How does the system work when you want to take out a mortgage? This is just the iceberg of questions we need to answer before real estate tokenization proves itself as an idea realistically worth pursuing.
Another key problem stems from the fact that no country has a solid regulation for cryptocurrencies and tokens, at least not at the moment. In terms of current regulations, most countries would agree that tokens are nothing more than a bunch of codes without any value whatsoever. That means users would have no legal ground to associate them with pieces of property, which is an issue that needs to be solved sooner rather than later.
Finally, the last problem we’d like to point out is that, as a result of everything we mentioned above, real estate tokenization would have to bring back some sort of centralization. This may sound a bit ironic as the whole idea of blockchain technology was to create a trustless environment that can operate without the need for a centralized third party to regulate and watch over it. Yet, while that concept may have worked great for cryptocurrencies, with real-world, physical assets like the ones in real estate, this is hardly the case.
Sure, real estate tokenization would offer a lot more decentralization than what the current market does and asset owners would have substantially more control, but total emancipation and self-regulation would not be in real estate tokenization’s dictionary if its protocols had to align with the current set of real estate laws. And, as things currently stand, there would be no going around government-issued regulations.
Why Real Estate Tokenization Is an Ideal Opportunity for Blockchain to Show Its Potential
Does real estate tokenization still have a lot of predicaments that need solving? Sure. But does it hold enough promise to make the effort of solving these issues worthwhile? You bet.
Think about what we stand to win: earlier access to capital, broader investor groups, more liquid opportunities, improved market transparency, better control over owned properties, reliable tracking of ownership, direct asset trading, real-time investing processes, etc. These would all be welcomed improvements whose positive impact would be felt instantly.
Another reason for optimism is that real estate tokenization would not necessitate a total reconstruction that entirely changes how the current system works from the ground up. Instead, blockchain implementation and tokenization would streamline the real estate market without completely turning it on its head.
This makes real estate tokenization a lot less daunting than cryptocurrencies and other, more disruptive forms of blockchain implementation. We’re talking about a great opportunity for blockchain technology to show its worth without having to completely obstruct the way things are currently operating, which will surely play a role in pushing its implementation forward quicker.
That’s the main reason why we firmly believe that real estate tokenization will be among the first blockchain use cases to truly make an impact on the world and demonstrate just what this technology can do on a big stage. And once successfully implemented, its benefits will make all the transitional troubles worth the effort, while the real estate market as we know it and all its current woes will soon start to feel like a distant memory.
Nena has a wealth of experience in blockchain, engineering, program management attained at Apple, Cisco, consulting agencies and startups. As a strategic blockchain advisor, she is able to share best practices and lessons learned to ensure that the clients achieve their blockchain goals. She has helped fintech, banking, supply chain, gaming, AI, IoT enterprises and startups design and develop end-to-end blockchain solutions, in order to add new revenue streams and business models, improve system performance and transaction speeds, reduce risks and enhance security, increase scalability, optimize costs and improve processes.
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