Tokenization is often seen as a way to make real estate investment more accessible to a broader audience. Could you share your insights on how tokenization is breaking down barriers in real estate investment?
Tokenization does three things:
(1) it digitizes, modernizes and automates workflows related to investor onboarding, subscription and trading, leading to massively reduced administrative cost,
(2) this in turn allows for fractionalization such that ticket sizes become $100/1,000 instead of $100,000, suddenly opening up for retail investors, and
(3) it allows for peer-to-peer non-custodial trading direct from wallet to wallet with no counterparty risk, turning real estate into a liquid asset.
This means retail (~40% of the world's wealth) now gets access to invest. It means the "illiquidity premium" of 20-30% is removed, making tokenized real estate worth 20-30% more. Real estate becoming liquid, makes it more attractive to institutional investors (~50% of the world's wealth).
Implementing tokenization in the real estate industry must come with its unique set of challenges. Could you elaborate on some of the technical, legal, or regulatory hurdles you've encountered, and how you've approached overcoming them?
Legal and regulatory hurdles are significant in many countries. In some countries, the concept of tokenization of securities / real world assets has not yet been legally clarified. In other countries, obsolete regulation hinders digitization of securities transactions such as notarization of trades, share stamp duty taxes, etc. In some countries, firms that want to tokenize need to register with the regulator or even go through a sandbox process.
From our perspective, a tokenized security (share of a legal entity owning a property) is just a digital representation of the underlying security and no special regulation is needed. Normal securities regulation (updated to support digital securities) should be sufficient.
Fortunately, most regulators are moving in this direction so more and more countries are allowing for tokenization.
And of course, many jurisdictions fully support it today, including the US, the UK, Switzerland, Luxembourg, Singapore, Hong Kong, Canada, Germany, etc.
We have clients in 40+ countries and legal partners in 60+ countries to ensure compliance of our clients.
Technical hurdles are mostly resolved by now. The ecosystem works better and better. We have solid and liquid stablecoins. We have regulated exchanges for security tokens. We have a variety of solid, mature platforms such as DigiShares'.
Looking ahead, how do you envision the evolution of tokenization within the real estate sector? Are there any emerging technologies or market dynamics that you believe will shape the future of this field?
We see a few important trends. One is the emergence of decentralized ID standards. A common DID standard for the entire tokenization (and crypto?) ecosystem has been a long time coming and is not yet apparent.
We are betting on Polygon ID which we see as the most promising standard atm. It is also totally open source and does not tie users into any specific vendor ecosystem. Even though created by Polygon, the DID standard can run on other chains, working with any KYC provider and any issuer.
Second trend is the development of real liquidity. This has also been a long time coming. The leading exchanges in the space haven't developed as fast as expected or hoped.
To remedy this, we are launching our own exchange, RealEstate.Exchange, the world's first blockchain-based exchange for real estate.
Last trend to mention hasn't really started yet but will in the next 1-2 years, following the creation of real estate liquidity.
Real estate collateralized lending will massively disrupt the real estate asset class.
Once it becomes possible to pull a loan in seconds from the DeFi lending space, we will see a massive inflow of investment into the real estate space and a massive cross-pollination between real estate and DeFi/crypto.
In one of your interviews, you mentioned the potential of tokenization to facilitate cross-border real estate transactions. Can you provide insights into a specific project where legal frameworks had to be harmonized across different jurisdictions? How did you navigate the complexities, and what were the key takeaways?
Due to the legal issues in many European and Asian countries, we actually recommend to many of our clients to select the US as jurisdiction.
Setting up a US LLC ready for tokenization is $1k and applying the Reg D and Reg S exemptions allows issuers to target US accredited investors and any type of investor outside the US.
Cost-wise this is a very attractive set up compared to what is possible in many other countries. We are currently working with at least 5 issuers that have selected this approach.
The real estate industry is increasingly focusing on sustainable development and environmental considerations. Can you share an example of how tokenization has been leveraged to promote or fund a sustainable real estate project? What were the unique aspects of this project, and how did tokenization contribute to its success?
We work with many clients where sustainability is important. Often the focus is on democratization and equal opportunity. Enabling the middle class to invest in real estate has the potential to massively increase world wealth and reduce poverty.