Tokenization is the process in which you replace sensitive data such as a credit card number with a non-sensitive equivalent known as a token, and real estate tokenization refers to creating tokens on the blockchain and assigning them to real estate properties that already exist or are currently under construction. Tokens may represent an interest in real estate but can also raise capital for development investments.
If you are new to the tokenization process, you will understandably have a lot of questions about how it works and what you can do. You will want to make sure you are working with an experienced Silicon Valley blockchain attorney at Structure Law Group, LLP, who can guide you through the entire process and help you achieve the results you desire.
Real Estate Problems Tokenization Can Solve
Because tokenization can be very flexible in its usability, a token may represent ownership in real estate in several ways. An overall kind of real estate using tokenization may vary just the same as traditional real estate investing, but tokenization allows for very little third-party input over any investors.
Because physical assets back the tokens, the value of tokens can fluctuate depending on the performance of an asset. What follows are some of the potential problems that tokenization can help solve.
Real Estate Liquidity
The liquidity of assets is one of the major issues with investing and selling real estate. Several parties may be involved in the normal course of a transaction, especially concerning the legal transfer of an asset. Tokenization can mitigate issues in specific situations, simplifying transactions in the real estate space. Instead of a typical transfer of the ownership process that occurs when selling a share of ownership in a real estate investment, tokenization may cut out a middleman and allow the transfer of ownership directly from an investor to another investor.
Many marketplaces list assets that are available for sale, but tokenization of assets means there will be a listing of all in a single centralized marketplace. Doing so will make an investor’s job easier by allowing searches for potential investments to occur in a single location. Investors will gain access to search for investments in other geographical areas and also allow sellers to get access to a larger pool of possible buyers.
Proof of Ownership
Whereas display of legal ownership is often through legal documents showing the sale of assets and the ownership rights of new investors, tokenization will utilize a distributed ledger system the same as cryptocurrencies. A distributed ledger will be a database that multiple people consensually share, synchronize, and access across multiple sites. Reflecting and copying changes or additions to the ledger to all participants happens within seconds. Every transaction will be sent and validated by the network making up the marketplace.
Easier Entry Barrier
Tokenization divides assets into smaller amounts of ownership. Just the same as bitcoin, the division of real estate tokens can make the barrier of entry to smaller investors far easier to overcome. Because transactions take place in a virtual environment, it is further easier to begin investing in real estate. Instead of needing legal documents to transfer ownership, a person who has little to no experience can easily make a purchase online.
Transparency and Market Security Improve
A distributed ledger system will not only help mitigate issues with proof of ownership but also helps improve overall transparency and security in the real estate market. Because every transaction will be processed and approved by other users in a marketplace, every transaction is transparent to the public. The security of the market will also have the backing of blockchain technology.
Transaction Costs Decrease
Using blockchain technology platforms for exchanging tokens has the potential to significantly lower transaction costs relating to real estate. Real estate investment trust (“REIT”) funds can also propose a value proposition, although REIT funds typically involve high minimum investments and upfront fees.
Understanding How Tokenizing Works
It is important to know what a token represents when developing a token. A token could represent ownership of the collateralized debt, an equity interest in a legal entity, a portion of a deed, or another kind of asset relating to real estate.
The tokenization of the interest could impact the regulations that apply to the token. Real estate tokens could qualify as securities under state and federal law.
Your options could be to register with the Securities and Exchange Commission (SEC) or satisfy an exemption. Regulations permitting exemptions from SEC registration can force different restrictions and limitations on transactions relating to the token.
The platform chosen for a token can create custom reports that you pass on to the SEC and public transfer agents. When you are establishing the legal entity for the token, the agreements need to automatically allow blockchain technology to implement and enforce equity transactions relating to the token.
So-called smart contracts make the different processes involved with the token seamless and essential to a token’s proper setup. There also needs to be testing of smart contracts also to identify technical or security flaws in the code that may cause the blockchain technology to create errors or allow for fraud because flaws can lead to the reissuance of tokens and be costly to the reputation of the token.
Virtual token issuers have to be careful to comply with all laws and regulations wherever they are offering tokens. Steps that issuers could have to take include verifying investors are accredited.
Because virtual tokens are subject to more than just regulation as securities, certain tokens may also have regulation under anti-money laundering, money-service laws, and regulations, as well as general anti-fraud and consumer-protection laws. Issuers and investors must consult a blockchain lawyer in Silicon Valley and tax professionals about developing a complete strategy.
While the development of real asset tokenization still suffers from a lack of financial markets, a lackluster legislative framework around digital assets, and a generally low level of awareness among investors, the tokenization of real estate assets is becoming a more popular sector of investment activity. Real estate tokenization offers a promising application of blockchain technology to increase an investor base through increasing liquidity in the market and allowing for even more small-scale investor participation.
Such a value proposition is particularly necessary in real estate because the market for real estate is generally more valuable than any other class of assets in the world while still remaining very illiquid. Tokens will be the next phase in the development of blockchain technologies, allowing investors to move from highly speculative cryptocurrencies without collateral to asset-backed tokens.
Call Us Today to Schedule a Consultation With a Silicon Valley Blockchain Attorney
If you have an interest in tokenization relating to real estate, make sure you have a Silicon Valley real estate attorney on your side. Structure Law Group, LLP understands why this new concept is confusing to many people and can help walk you through the entire tokenization process.
Our firm can work closely with you and use tokens to achieve your real estate goals. You can call our business attorneys at (408) 441-7500 in Silicon Valley, (310) 818-7500 in Los Angeles, or (512) 881-7500 in Austin, Texas, or contact us online to take advantage of an initial consultation so we can sit down with you and answer every question you have.