Tag: tokenization

Real Estate Tokenization

Real estate has always been considered a safe investment compared to the stock market. However, it is also more expensive and illiquid. Though real estate is the largest asset class with a global value of $228 trillion, many retail investors are precluded from investing in this asset class, particularly commercial real estate. Barriers to entry include large upfront investment, very low short-term liquidity, management costs, among others. Therefore, how to make investing in real estate more affordable and accessible to retail investors has become an urgent matter.

In recent decades, a process known as securitization of real assets has reduced the frictions and costs associated with accessing real estate exposure for such retail investors. Among financial instruments that provide indirect investment via securitization of real assets, the most common are public and private real estate investment trust (REIT), real estate investment fund, Real Estate Exchange Traded Funds (ETFs), and real estate crowdfunding. Though investors can already buy and sell real estate investment trusts (REIT), but these often have high minimum investments and represent a large portfolio of companies rather than a single property or new development.

To work around the issues, a new form of securitization known as tokenization of real estate has emerged and is gaining popularity. Tokenization helps asset or fund owners raise capital more efficiently, and gives investors unprecedented access to private real estate investments, transparency, and liquidity.

Tokenization is a way to securitize real assets by dividing them into shares that can be sold to investors. It involves representing ownership of an interest in real estate with virtual tokens that exist on a blockchain which is known as security tokens. These tokens are created using blockchain technology, and once created can be traded on digital exchanges or Alternative Trading Systems (ATS).

An actual tokenization use case happened in Paris recently. The property is known as AnnA Villa, which is valued at € 6.5 million. The Villa became the first-ever property in France that was sold via a blockchain transaction. The transaction took place in three steps. First, the ownership of the building was transferred to a joint-stock company called “SAPEB AnnA.” Next, the ownership of the company was divided into 10 Ethereum-powered tokens which were distributed among the new owners. In the final step, each of these tokens was then further broken down into 100,000 units, meaning each token has a face value of € 6.50. Therefore, you can invest as little € 6.50 in the villa.

Another good use case is Fracproperty in Australia. They have obtained Australian financial services  licence(ASFL) to implement real estate fractionalization. Now at STO stage and currently airdropping their tokens. The tokens will allow you to enjoy fractional rental income and capital gain. You can sign up with this invitation link below to receive 10 FRAC token via the airdrop.

Sign Up to Receive Free FRAC token

Advantages of Tokenization

The main advantage of real estate tokenization is improved liquidity. Liquidity means the ease with which an asset can be bought or sold as the cost of entry will be reduced. Tokenization allows a real asset to be subdivided into smaller units and sold as security tokens to potential investors. For example, a 5000 sqft property that costs $1,000,000 can be divided into 100,000 tokens, and each token sold at $10, a price much more affordable to retail investors.

In addition, tokenization will widen the market reach by creating a global investment pool that can extend the real estate market to buyers and sellers from around the globe. Anyone with sufficient capital and an internet connection can easily participate in buying and selling real estate located anywhere in the world.

Other advantages include the following:

  • Transparency: Blockchain is a public distributed ledger so every transaction of the security tokens can be tracked and accessible to anyone.
  • Security: Blockchain is a distributed ledger that is encrypted using advanced cryptography. Every transaction is encrypted into a hash which is not hackable.
  • Immutable: Once a transaction has been submitted to the blockchain and subsequently confirmed, the data cannot be altered. This means no one can falsify the transactions and hence frauds can be prevented.
  • Improved Operational Efficiency: Smart contracts can automate processes such as compliance checks, investor whitelisting, and post-issuance matters including dividend distribution, thereby reducing cost and settlement time.

Implementation

Implementation of a real estate tokenization project involves the following matters that must be dealt with:

  • White Paper-we need to prepare a whitepaper to describe the tokenonomics, the business model, the technological requirements, legal compliance, and more.
  • Type of Tokenization- We need to decide what interest to tokenize, the real asset itself, the equity of a real estate, a mortgage of the property, or others.
  • Asset Information-Type of asset, whether residential or commercial, the property owner, location of the property, etc.
  • Tokenization Ratio-Whether to tokenize part or entire property
  • Smart Contract-The smart contract must address the questions like the total supply of tokens, the amount of tokens to be distributed to holders, do the holders receive dividends, and so forth. Besides that, you must decide the token standard, usually, we adopt ERC20. In addition, the smart contract must be audited by a certified auditing firm.
  • Securities Regulation-Real estate tokens are securities therefore must be registered with regulatory bodies like SEC.
  • Tax-The earnings from the tokens may be subjected to taxes such as property gain tax etc, must engage tax experts to work out the tax structure and strategy.
  • KYC/AML– Real estate token issuers must comply with AML and KYC laws and regulations. 

Tokenization Process

Basically, real estate tokenization involves the following steps:

  1. Asset Identification—identification of the real estate asset, whether it is commercial or residential, and its location. Besides that, it may involve the acquisition, financing, and appraisal of its value.
  2. Smart Contract Generation—Taking compliance with securities laws into consideration in the creation of the smart contract;
  3. Token Creation—determination of the total supply and type of tokens.
  4. Marketing and Distribution—advertising of the offering, confirmation of investor accreditation and listing of tokens on the exchange through a security token offering (STO); and
  5. Post-Listing Support—ongoing support for investors and distributing dividends or other rights to payment.

Example Real Estate Tokenization: Aspen Coin


A good example of a real estate tokenization project is Aspen Coin. A real estate asset management and advisory firm by the name of Elevated Returns LLC issued a token that represents ownership of Aspen Digital Inc, a Maryland corporation formed with the sole purpose of owning the St. Regis Aspen Resort. Tokenization was handled by the token issuer platform known as Securitize (digital security issuance platform). In addition, Templum, a registered broker-dealer and alternative trading system managed the primary distribution, and Computershare (shareholder services) provided custodianship. Marketing was also supported by Indiegogo, a crowdfunding platform. The project successfully raised $18 million.

The tokenized securities were exempt from registration via Regulation D, and therefore were offered and sold only to accredited investors by means of a private placement memorandum. The minimum investment was set at $10,000. Besides that, dividends are to be distributed on-chain to the token holder wallet using Ether. Secondary trading
is provided by Templum to whitelisted investors, and whitelisting is also provided by Templum.

References

Blockchain-Based Tokenization of Commercial Real Estate

Tokenization Explained

What is Tokenization?

Tokenization has become a buzzword today due to its adoption in the payment industry and blockchain. However, Its usage is not limited to the aforementioned industries. It can be applied to many other industries such as healthcare, stock trading, gaming and more.

The primary purpose of tokenization is to ensure data security. It is used for handling sensitive data such as payment, medical record, personal ID and more.

According to Wikipedia,

“Tokenization, when applied to data security, is the process of substituting a sensitive data element with a non-sensitive equivalent, referred to as a token, that has no extrinsic or exploitable meaning or value. The token is a reference (i.e. identifier) that maps back to the sensitive data through a tokenization system. The mapping from original data to a token uses methods which render tokens infeasible to reverse in the absence of the tokenization system, for example using tokens created from random numbers.

The tokenization system must be secured and validated using security best practices applicable to sensitive data protection, secure storage, audit, authentication and authorization. The tokenization system provides data processing applications with the authority and interfaces to request tokens, or detokenize back to sensitive data.”

In short, Tokenization is the process of substituting sensitive data with non-sensitive identification symbols known as tokens. Tokenization retains all the essential information of the data without compromising its security.

A Short History

According to Wikipedia, the concept of tokenization has existed since the invention of the currency system centuries ago. It was adopted as a means to reduce risk in handling financial instruments by replacing them with surrogate equivalents.

In addition, coin tokens have a long history of use replacing the financial instrument of minted coins and banknotes. In more recent history, tokens are used in mass rapid transit payment, casino chips and more.  The adoption of the above systems is to replace physical currency and cash for reducing risks such as theft.

In the digital world, tokenization techniques have been used since the 1970s. They were meant to isolate real data elements from exposure to other data systems(Wikipedia, 2018). In databases, surrogate key values have been used since 1976 to isolate data associated with the internal mechanisms of databases and their external equivalents for a variety of uses in data processing.

More recently, these concepts have been extended to consider this isolation tactic to provide a security mechanism for the purposes of data protection. For example, in the payment card industry, tokenization is one means of protecting sensitive cardholder data in order to comply with industry standards and government regulations.

Definition in Blockchain

In blockchain, tokenization is a method that converts rights to an asset into a digital token. Thus, we can take an asset, tokenize it and create its digital representation that lives on Blockchain. Blockchain guarantees that the ownership information is immutable.  The tokens created in this way is also known as crypto tokens.

For example, you can tokenize an asset such as a book that you authored. The book is kept somewhere while the book token is uploaded to the blockchain network. The book crypto token is a representation of the book ownership. You can specify how many tokens need to be transferred to your crypto wallet before you can transfer the book ownership to a buyer by means of a smart contract.

One of the actual use cases is https://stamp.io , a platform where you can store your tokenized documents on the block and certify it, as shown in the following figure:

Cryptokitties is a brilliant example of the crypto token that allows users to acquire an adorable collectible by transferring some cryptocurrencies to the owner. The owner will then transfer the digital collectible to the buyer. The transaction occurs automatically via the smart contract.

Another use case is we can create a crypto token that represents some customer loyalty points on a blockchain. This type of token is also known as utility token. It can be used to manage customers’ reward schemes for the retail chains. Other examples include the crypto token that gives entitlement to the token holder to view certain hours of video streaming on a video-sharing blockchain. A house owner can sell his house by transferring the tokenized house deed to the buyer. Last but not least, a crypto token may even represent another cryptocurrency.