Blockchain Still Raises Eyebrows of Skepticism
However, there are two reasons why tokenization is worth the trouble: liquidity and fractional ownership, both of which present opportunities to reduce costs and friction in the investment process.
SEATTLE—Much has been discussed about how blockchain, and more specifically security tokens, promises to change the real estate industry, especially as security tokens gain widespread use and acceptance by traditional markets. Blockchain comes into play during the acquisition phase of getting information and approvals, as well as orchestrating all interactions between financial and municipal entities.
“Any tiny mistake or delay—a high possibility in the paper-heavy back offices of most real estate services, even today—can derail the entire process,” says the New Alchemy research department.
Of course, there is skepticism surrounding security tokens but Moore says there are two reasons why tokenization is worth the trouble: liquidity and fractional ownership, both of which present opportunities to reduce costs and friction in the real estate investment process. For example, by using a security token offering to raise capital for investing in real estate, it becomes possible for issuers to automate the restrictions REITs put on the industry and improve accessibility to investment.
“Real estate is a very inefficient business with lots of intermediaries, consultants, contractors and other professionals,” Michael Sherry, New Alchemy’s vice president and general manager of real estate, tells GlobeSt.com. “Each step requires paperwork and coordination. Block chain is a great solution to expedite actions in the sector, as well as reduce friction, timelines and costs. The same is true with financing aspects, including debt, equity, and legal documentation and processes.”
For investors who are not accredited, their access to the real estate asset class is strictly limited so many choose to invest in REITs. For the investors who are accredited and can more easily participate directly in the real estate market, individual investments are often beholden to sales restrictions, such as year-long lockout periods or infrequent liquidity events.
By using a security token offering to raise capital for investing in real estate, it becomes possible for issuers to automate some of these restrictions and improve accessibility for investments. If an issuer designs a security token offering under Regulation A+, for instance, non-accredited investors may be able to participate. When more of the processes involved in issuing a sale are automated, the operating fees involved for all participants should decrease, says the New Alchemy research department.
By tokenizing securities, real estate capital issuers and investors could benefit by reducing operational costs, such as when preparing tax documents. Plus, depending on the type of security it represents and technical implementation of the token, investors in real estate security token offerings could be given more choice in selling investments, such as directly for fiat, for a cryptocurrency or for another digital asset.
“Security token offerings for facilitating ownership of real estate interests, including different forms of recurring payments, can be issued today using public blockchains such as Ethereum and a token, like an ERC-20 protocol token,” says the New Alchemy research department. “The purpose of the tokens would be to maintain the ledger of owners for the corresponding asset, and to provide those owners with the ability to prove or to transfer their ownership, and for this, they may not need to be accredited.”
The type of infrastructure and software needed to support sophisticated tokenized real estate platforms are in operation today, and companies are able to build complex tokens and related ecosystems with compliance in mind. However, to accomplish all of the improvements for the real estate market industry which tokenization could enable, there is still a great deal of industry body planning and determinations made by regulators that need to be accomplished.
It is likely to take a long time before a widely accessible platform for investors to purchase, bundle and trade tokenized real estate securities could be launched, but the value creation of such a system should be immediately recognizable. Such as in the early 1900s, when innovations in technology and finance enabled many investors to enter the public stock market for the first time, blockchain technology and security token offerings could do the same for commercial real estate. For now, tokenization, security token offerings and blockchain technology represent a cost-efficient and technically sophisticated method of maintaining a property ownership ledger, which are tools that could enable a more liquid and equitable commercial real estate industry, the New Alchemy research department concludes.