Industry Disruptor: Blockchain Tokenization Explained

NEW YORK CITY—“Tokenization is a new type of technology that develops digital assets,” says Katya Fisher, a partner in Greenspoon Marder’s blockchain, digital assets and technology transactions practice group. “It’s a digital upgrade for analog assets. It’s a way to transform capital markets.”

Tokenization is supported by blockchain, a technology that allows for sharing of files and digital assets without generating duplicate copies. Blockchain is a peer-to-peer digital ledger where the software records each transaction in a block without a third party (such as a bank which is needed for most current electronic payments).

Blockchain is the technology used for cryptocurrency like Bitcoin or Ethereum. Cryptocurrency needs blockchain but blockchain does not require cryptocurrency.

With blockchain, the digital asset doesn’t need to represent currency. “It can represent shares in a company. It can represent stock,” explains Fisher. “This opens up a whole new world with respect to real estate investments and real estate ownership because we can use blockchain technology to create faster, more efficient ways of transacting ownership.”

Mark Fawer, a partner in Greenspoon Marder’s real estate practice, says for generations real estate has been bought and sold in the same way. An investor pays to receive a share or membership interest in a company owning and developing real estate. If it’s an income producing asset, the investor will get monthly or quarterly distributions. But the investment is extremely illiquid, and depends on the sale of the property to return the principal.

He describes how with private transactions, the property interest owner needs to find a buyer. The investor then needs to negotiate, enter into documentation, get permission from the general partner, the managing member, and submit paperwork into a transfer agent. This could take weeks or months.

“What could revolutionize real estate investment is tokenization where the token is that digital representation of that very same partnership interest. Instead of being represented by a paper certificate it’s represented by a token that can be held in a digital wallet like cryptocurrency,” says Fawer.

He believes a robust secondary market will develop in the future, which will make the asset far more liquid. If someone wants to sell, they won’t have to wait. With the blockchain technology, Fawer notes there is greater transparency and protection in ensuring the sale is limited to accredited investors. People would go through the KYC (know your client) and AML (anti-money laundering) processes, the same requirements that banks have for investors in fund raisings. But tokenization is faster and more efficient.

Plus, Fawer explains a token priced at $1 million could be subdivided so pieces of the token could be traded. In addition to having greater liquidity, the digital assets would be accessible to more investors. This is true not only financially but also geographically.

“Someone who is sitting in Shanghai or Nairobi who wants to buy a real estate asset that has been tokenized that’s located in the heart of Manhattan could now do it in a much more transparent, open way,” says Fawer.

Tokenization is already in the market and Fisher predicts more robust movement in the next couple of years. But she points out although some real estate transactions have occurred using cryptocurrency, it’s not the most lucrative usage. That’s because the IRS has classified cryptocurrency as property, subject to capital gains tax whenever it is disposed of or sold.

Now, bipartisan voices are opposing Facebook’s plans to launch and operate its own cryptocurrency. European officials are also voicing concerns that Facebook’s Libra could create financial instability.

Nonetheless, Fisher predicts other big companies will create digital currency. “Seeing a company like Facebook get into cryptocurrency obviously is a tremendous signifier that this is going to get ramped up within the next couple of years,” she says. And the legal expert also foresees regulators being forced to grapple with the cryptocurrency questions and devise solutions.