How tokenization creates more investment opportunities




For several decades, the only globally accepted assets were gold, silver, diamond, and a handful of other precious stones. Since the emergence of blockchain technology and cryptocurrencies, tokenization has stepped into the asset investment arena. In the real estate industry, tokenization has unlocked new forms of investment and trading for entrepreneurs from across the globe.

What is tokenization?

Tokenization is the creation of a local network with a specific asset class where a particular token is the measure of value. Investors can join the new investment game where tokens are used as equity or instruments of trade. So, how does it work? Participants get fractional ownership of an asset while still gaining access to other assets like real estate properties. In other words, tokenization makes illiquid assets like land or property liquid and tradable. Moving into the future, tokenization will expose the masses to a broad range of investment opportunities.

Now, tokenization is basically the digitization of assets. It is made possible by representing physical assets with distinctive identification symbols. The ownership of these assets can be transmitted and traded on digital platforms. In the blockchain domain, tokenization entails converting rights to an asset into a digital token. More often, the blockchain network generates tokens through smart contracts and ascribes its value relative to the actual asset. Thanks to the unparalleled transparency of the blockchain, tokenization makes many assets more attractive to investors from across the globe.

Tokenization taking a new shape

There are numerous derivative tokens cropping up with each passing day. Some are created to back assets rather than have the assets backing the tokens. Today, various bond instruments appear on the market, and they take unique token models where the tokens appear more like equity or instruments of trade. However, these tokens are not in any way linked to dividends, revenue, profits, or voting rights. Bankers and investment institutions are quickly embracing these fundamental shifts to create exotic instruments for trading.

Tokenization is already revamping platforms like Twitter, Youtube, and other areas of life. Basically, tokens provide an alternative avenue for investors to store their assets. It will ultimately pave the way for more global adoption of blockchain technology. After the 2018 Bitcoin bubble burst, the crypto community has made a profound shift to regulatory oversight. As a consequence, security token offerings (STO) are today deemed the future of cryptocurrencies.

Stocks or securities are financial instruments that represent assets in the real world. Ordinarily, if an investor purchases security, the transaction is signed on paper. The same procedure is followed for security tokens, except that the signing is done on a blockchain. Being securities, all transactions are executed in line with the prevailing regulations and laws of the jurisdiction.

Tokenizing Real Estate

Real estate tokenization involves representing an ownership interest in a real estate property with a token. Tokens can represent ownership in the actual asset or a stream of revenue based on cash flows from the asset. It can also represent equity in a legal system that owns the asset or interest in debt secured by the asset, just to mention a few.

Benefits of Tokenization

So, why would a real estate manager or investor choose to tokenize? Tokenization is not limited to real estate assets but to all illiquid assets you can think of. The investment pool for tokenization is truly global. Actually, anyone with an internet connection and meets the capital requirements can invest in security tokens.  Tokenization has created liquidity in the real estate industry hence lowering investor barriers. The accredited investor restrictions will view tokenized real estate assets in a more liquid manner.

Ever heard of programmable securities? Tokens can be allocated and managed through smart contracts that can automatically enact critical processes like automated dividend payout hence reducing costs. You may still have to execute some manual work, but it would be relatively minimal compared to working without smart contracts.

Tokenization also offers high security and immutability  through cryptographic encryption. Blockchains tracking these assets are append-only, which means that every transaction that happened in the past is made public to everyone, including the regulators.

Considerations for tokenizing real estate assets

There are many considerations to make before tokenizing real estate assets, and it is usually a delicate process to handle well. If, for instance, you get the smart contract wrong, you may end up burning the old tokens and issue (airdrop) new ones to investors. This is a difficult and lengthy process that can bring a lot of embarrassment. Other important considerations include:

  • What the token truly represents. It could be shares in a special purpose vehicle owning the real estate or a right to cash flow from the property in question.
  • Security regulations. Is it a Reg D offering, Reg S, or Reg A+? Speak to the relevant representative to verify compliance with all security regulations.
  • Have you verified that the KYC/AML/Accreditation is acquired? You only need to check if the U.S. KYC/AML/Accreditation is adequate or you need global compliance.

There are several other issues to consider including tokenization ratio, tokenomics, cash flow to token holders (can be either guaranteed or discretionary), mortgage considerations, and tax considerations.

What next for tokenization?

Anyone who owns or manages real estate assets or anyone who wishes to invest in a more liquid real estate asset should consider tokenization. It presents an incredible opportunity for both real estate owners and managers to enjoy early access to capital and a wider investment pool. Additionally, investors get more liquid opportunities and the potential to earn accreditation. However, tokenization is a technical process that requires professional counsel and guidance on legal, audit, tax, and technology areas.

Tokenization is slowly entering a new era. It is moving away from utility tokens and initial coin offerings (ICOs) to the concept of regulated STOs and security tokens. It has the potential to become the mega trend and grow into a trillion dollar industry. Today, everyone is talking about tokenization and a lot of developments are happening on the background. Many people view it in terms of increased liquidity and fractionalized ownership. However, it offers more opportunities that could change the world.

Final Word

It’s still early to count chicks in the blockchain and tokenization world, but the future looks brilliant. Exciting times lie ahead and tokenization is poised to disrupt various industries with the potential of providing more investment opportunities. In the future, tokenization will surely open up new horizons and opportunities for investors from across the globe.

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