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Real estate tokenization has gained popularity in the cryptocurrency industry and is considered a security in most countries with established financial regulations, including the United States, European Union, United Kingdom, and Australia. This article delves into the limitations of tokenization-securitization and explores the idea of digitizing property rights to revolutionize land registries. The concept of the “title token” and the blockchain estate registry were introduced in a previous article. Now, we will examine the potential of securitization and why it is essential to redesign the system for the digital economy to advance.
Land registries should transition to blockchain technology | Opinion
Explanation of securitization
Traditionally, real estate has been viewed as a valuable asset class but has posed challenges for smaller investors due to its illiquid nature and high upfront investment requirements. Blockchain technology is believed to offer a solution through the tokenization of real estate, which involves converting real-world assets into digital tokens tradable on a blockchain. This subdivision of assets into smaller units enhances accessibility and liquidity for investors, allowing the tokens to be easily traded on secondary markets.
However, a critical examination of the limitations of tokenization is necessary. This scrutiny reveals the inadequacies of this model and highlights the need for a comprehensive redesign of the land system to ensure meaningful progress.
Tokenization as securitization
Tokenization represents securitization, whereby real estate assets are converted into digital tokens that represent shares or units in a special purpose vehicle (SPV). This type of security is subject to regulations and falls under the category of an “investment product” or “managed investment scheme.” From an economic standpoint, it involves a promise in exchange for cash to perform a venture that may result in profits. However, securitized real estate forms only a small portion of the overall property market due to its limited economic application.
Challenges of real estate tokenization
The initial coin offering boom in 2016-2017 created unreasonable excitement around real estate tokenization, aligning with the overall hype in the crypto industry. Tokenization is associated with the potential for high profits, but real estate prices do not fluctuate in the same way as stock markets. This has led to unrealistic expectations about the gains from tokenized property, especially when compared to the broader real estate market.
REITs and real property tokens
Publicly listed real estate investment trusts (REITs) democratize investments in real estate by reducing barriers, offering shares of companies that own real property traded on exchanges. However, the daily dollar volumes on REIT markets are much lower than on major stock exchanges, and these markets exhibit lower volatility compared to the broader stock market. The overall excitement about real estate tokenization appears irrational, and it is essential to impose progressive regulations to make the securitization of real estate more efficient.
Conclusion
The securitization of real estate is not a revolutionary concept, and speculative excitement around the tokenization of real estate markets is unfounded. While blockchain and web3 technologies can enhance the efficiency of securitization, they will not significantly impact the entire real estate market. The old-fashioned land registries with paper-based transactions and bureaucratic services present a bottleneck for the digital economy’s future. The government’s inertia to modernize these registries stifles the further evolution of the economy, despite the potential for efficiency and innovation with web3 technologies. Ultimately, securitized and tokenized real property have a marginal effect and do not change the overall picture.