by Helen Disney (Founder, Dots Ventures)
What does it mean to ‘tokenise’ a property? The cutting-edge topic of the moment is whether or not real estate investing can be revolutionised using blockchain technology.
This means representing an investment in a property as a digital security ‘token’ – rather than as a traditional security – and keeping track of ownership using a blockchain as the secure global ledger of record. Security Token Offerings (STOs) are intended to increase liquidity by breaking down real-world assets such as real estate or art into smaller fractions and therefore opening up opportunities to a much wider pool of potential investors.
At the recent Security Tokens Realised conference held in London, Dots Ventures hosted a high-level industry roundtable to discuss practical issues surrounding implementation. A group of industry experts and investors met to discuss the financial innovation and liquidity that tokenisation could bring to the property market.
The roundtable opened with a case study from MIRIS, a Norwegian company which began as a residential sustainable development firm and has completely transformed its business model using blockchain for its internal operations as well as implementing tokenisation of its entire property portfolio of 26 sites across Scandinavia.
MIRIS is now pioneering at the cutting edge of creating smart cities and communities and using its blockchain platform – MIRIS X – to revolutionise property investing. In addition to tokenising their own portfolio of properties, they are planning a white label solution so that other developers can list properties on the MIRIS X platform, which is built on top of the Ethereum blockchain.
One of MIRIS’s flagship projects, the SVART hotel which is being built in the Arctic Circle as the world’s first energy positive hotel will all be run on the blockchain with the aspiration to have no invoices or paperwork – everything will be automated and run on smart contracts.
MIRIS and a few other notable blockchain property projects – such as a luxury student residence in South Carolina called The Hub and a $30M Manhattan condo being tokenised by Propellr and Fluidity – are at the forefront of real estate tokenisation. Yet we are still at the very beginning of this phenomenon and there are not yet any real estate tokenisation projects that have been made widely available to traditional investors. So which elements of the traditional property investing process are most likely to be disintermediated?
Land registry is a clear use case for blockchain and is already being implemented or explored by a number of countries including the UK, Sweden and Georgia. This will eliminate a lot of legacy systems and paperwork and give better access to data related to the asset such as a property’s title history or easements. It could also assist in the due diligence process and allow for better decision making around property investments.
Legally, however, question marks remain about how fractionised ownership will be treated, as the concept does not yet exist in UK property law and UK shares cannot yet be represented as digital securities. Could fractionalised ownership could simply be wrapped up in a Special Purpose Vehicle (SPV) or Real Estate Investment Trust (REIT)? Maybe it would not be too much of a leap from having electronic share certificates to having a token represented on an immutable blockchain?
From a technical perspective, questions arise around how legal ownership would be recorded and the security of the data. What happens if the property owner loses their private key to access ownership of the asset? Is it efficient to store property data on a blockchain? Law firms and security token exchanges are currently exploring the use of Orphan Special Purpose Vehicles where the banks are legal owners of the vehicle and the investors become beneficial owners of the instruments. This may be an easier place to start while the industry is still finding its feet.
Going back to the question of disintermediation, perhaps none of the traditional players in the property investing process will be eliminated but instead they will simply be made much more efficient. Is operational efficiency a more likely benefit than greater liquidity? One key question regarding liquidity is trust, especially in trust in valuations – how will we get investors to trust in this new process of tokenisation which is still a very new idea for most traditional investors in property markets?
More experienced blockchain investors see two benefits to real estate tokenisation – efficiency savings and also liquidity, in the sense of tapping into undeployed capital in the global economy. The key questions for them are what is being kept on the blockchain and what is ‘off chain’, where is the target market for tokenised properties, and how fungible is the token invested in the property? How can this idea go beyond the early adopters and move into the mainstream?
The benefits of liquidity may also be overstated – while you can create the technical platforms you still need humans to make a market. There is currently still an issue around creation of primary and secondary markets for security tokens and futures contracts will not guarantee demand if there is no liquidity. There is also a need for multiple security token exchanges and regulated broker-dealers interested in primary issuances. And many will naturally look to blue-chip names such as investment banks to instil trust and expand the market.
What is next in terms of how we can take real estate tokenisation further? Better investor education will certainly be one of the keys to future adoption. Institutional investors are a long way from entrusting value transfer onto a public blockchain. Trust may be increased by the arrival of more regulated venues and regulated custodians. There is also a need to be able to replicate a trade in a property token, since the prospect is much less interesting if this is a one-off deal.
The discussion at Security Tokens Realised concluded that real estate tokenisation is still in its infancy but the growth of interest in this technology – and the prospects for capitalising on this enormous investment opportunity – means the trend is only likely to gather pace.
Helen Disney is a Founding Partner of Dots Ventures, a firm that advises businesses on how to harness blockchain technology and tokenisation to add efficiency and liquidity to their business models.