Blockchain technology, which has been around for several years, has substantially altered the global landscape. Experts say that services based on the blockchain will have a big impact on many parts of the economy, especially the tokenization of real estate, financial firms, and businesses.
Real estate is considered one of the safest and most profitable investments. When asking any person what the best form of investment and asset management is, they will almost definitely suggest buying an apartment or commercial property. However, many people may find this challenging to accomplish without substantial amounts of money. Tokenization transforms the value of real estate into a token that resides on a blockchain, facilitating digital ownership and transfer. Each of these divisible tokens represents a fractional ownership position in the real estate.
Tokenization of real estate has become a unique way to invest in the past few years, with benefits for both the person who issues the tokens and the person who buys them.
Benefits of Real Estate Tokenization
Increased liquidity
Tokenization facilitates the purchase and sale of real estate. Because land ownership is reflected by digital tokens, handing over control is easier. It minimizes purchase time and costs by eliminating the necessity for middlemen such as estate agents, lawyers, and trust agents. Using blockchain technology, it is easy and legal to transfer real estate tokens. This lets owners grow their portfolios, reduce losses, and make the real estate market more stable.
Fractional Ownership
Tokenization makes fractional ownership of real estate feasible. This implies that buyers can acquire a portion of a property rather than the complete property. Investors who own a fraction of a property can expand their holdings, invest in various properties, and reduce their risk.
Accessibility
Individuals can now invest in real estate more easily, thanks to tokenization. Investing in real estate used to require a significant amount of capital. It allows investors to invest smaller quantities of money, thereby making it more accessible to a broader range of investors.
Transparency
Blockchain technology offers a secure and transparent infrastructure for real estate transactions. The blockchain records all transactions, providing a complete-proof and auditable record of ownership.
Reduced Transaction Costs
Blockchain technology offers the ability to streamline investment transactions and minimize transaction costs by using automated processes and a permanent, unchangeable digital record. As a result, investment transactions are often completed faster and at reduced cost to the parties involved, allowing investors to earn larger returns. Tokenization also has a lot of other benefits, such as tracking the capitalization table in real time, making it easier to access, and making buyers more accountable.
Challenges in Real Estate Tokenization
Implications on Securities Law
In general, we would consider tokenization of real estate as a security, but we should first conduct an investigation of each unique token. A prospectus must accompany the token’s sale if it qualifies as a security. If it is not a security, it must be sold with an exception, like the “accredited investor” exemption.
In addition to the disclosure requirements, the issuer must also consider the licensing requirements.
Regulation
As of now, there is no regulation for cryptocurrencies and tokens. Most countries would recognize that tokens are nothing but codes with no legal value. As a result, users would lack a legal basis to associate themselves with specific pieces of property. Tokenization of real estate is still a relatively new concept, and many nations lack a regulatory framework. This is a problem for investors and issuers because they have to figure out how to comply with the regulatory framework.
Technical Difficulties
Besides the typical cybersecurity threats that any blockchain project should have, such as ensuring that smart contracts are well coded and having continual audits to avoid exploits, hacks, and assaults, tokenization projects face specific technological problems. These projects must verify that the off-chain real-world assets are consistent with their on-chain counterparts. This can be accomplished in a variety of ways, the most popular being by incorporating an oracle into the smart contract, which is a mechanism to obtain data from the external world and guarantee that all information is up-to-date.
Real-world events can result in the destruction of a tokenized property or the occurrence of outages in a tokenized energy grid or power plant. The on-chain coin representing the physical assets must reflect this.
Dispute Resolution Obstacles
The negotiation of asset-based tokens, similar to any other financial contract involving two or more parties, has the potential to result in a disagreement. Because of the increasingly globalized nature of token generation and arbitration, there are jurisdictional concerns, making it unclear which court has jurisdiction to handle these disputes. This issue can be clarified by including an exclusive jurisdiction or arbitration clause in the token purchase agreement.
The Future of Real Estate Tokenization
Tokenization in real estate assets is a practical and cost-effective way to invest, but as a comparatively recent investment option, authorities have yet to establish a standard set of laws that regulate real estate tokenization. The regulatory frameworks used depend on the type of asset tokenized.
Furthermore, we must overcome market uncertainty and information gaps before we can implement real estate tokenization extensively.
