Real Estate Tokenization Explained
Tokenization is the concept of representing the ownership of securities (company equity, bonds, etc.) as tokens on the blockchain. These tokens are called security tokens, tokenized securities, or increasingly digital assets or digital securities.
Real estate is the single biggest asset class that may be tokenized. Total real estate is worth around $228 trillion today and only 7% of this is available to retail investors. However, more than 80% of people believe real estate to be a good investment. DigiShares aims to help close this gap.
The blockchain itself is a global network that allows individuals and business entities to transact directly with each other in an efficient and inexpensive manner, without using intermediaries as banks and notaries. With tokenization, real estate assets can be represented as tokens on the blockchain that will become as efficient and inexpensive to issue, transfer and trade as other cryptocurrencies.
Tokens on the blockchain can be self-custodied. This means that investors can safekeep their own assets in their own wallet (similar to a bank account on your mobile device or computer). Or they can choose a custodian to safekeep their assets. Custodians are like banks as they provide safe and insured storage of digital assets. However, they are compatible with the blockchain, provide APIs, and are generally quite inexpensive.
Tokens on the blockchain can also be transferred and traded in a peer-to-peer fashion. This means that any investor can directly transfer or trade with any other investor. The transaction itself does not need to be mediated by any middleman (bank, CSD, notary, etc.) but the blockchain itself makes sure that the transaction is settled correctly. The blockchain can even remove any counterparty risk, something that normally requires an expensive intermediary, such as an escrow account with a lawyer. The direct trading removes a lot of friction and makes securities processing on the blockchain highly secure, efficient and inexpensive.
Real estate is highly illiquid but through tokenization, it becomes possible to directly transfer and trade real estate assets to other investors in a very inexpensive and efficient manner. Platforms such as the one provided by DigiShares make this possible and maintains a fully updated share cap table at all times.
Real estate processes are also traditionally very cumbersome and paper-based, involving a lot of manual steps with banks, notaries, etc. With blockchain-based processing of real estate assets, it becomes possible to digitize and automate many of these processes to a much higher degree. With a platform such as the one from DigiShares, these processes can be fully automated:
– Registration of new investors and collection of required information. The actual verification of this can be outsourced to a third-party KYC provider for USD 2-3 per check
– Purchase of shares and investment into the property. The purchase process can be fully automated, allowing the transaction to occur with no manual processing at all. The share cap table is automatically updated after the purchase is completed
– Payment of dividends and interest. By clicking a single button, it becomes possible to pay out to all investors at once, based on a predefined allocation formula
– Trading of digital assets. DigiShares provides a built-in OTC marketplace where investors can trade with each other. No manual processing or participation from the real estate administrator is required.
The very high degree of automation makes it possible to have hundreds of investors in real estate projects unlike today where the number of investors is often limited to below 10. This in turn makes it possible to “fractionalize” and allow investors to participate with $1,000 or $10,000 size investments.
Only a few “accredited” investors may have the normally required $100,000 or EUR 100,000 to invest into a real estate project, but many more investors may have $10,000 or EUR 10,000 to participate. This opens up the market to new types of investors for the real estate developers and it will become easier to finance good projects.
It also allows a much higher percentage of the population to participate in real estate investments and develop a more professional investment strategy to diversify and protect their savings over the years. This is called “democratization” of real estate.
With the DigiShares white-label platform, real estate developers will get a structured platform that enables them to expedite and manage processes related to financing, refinancing, or selling real estate development projects. In addition, they will be able to efficiently and consistently manage a group of owners of a specific project with all that entails – the maintenance of the share cap table, the facilitation of shareholder meetings, the payment of dividends or interest, and the reissuance of lost tokens, etc.
If you are interested in learning more, please contact DigiShares at [email protected]