When our team first started reporting on creative blockchain projects in through The Creative Crypto, we had a keen eye on how the tokenized economy would affect the building development and real estate sectors. If blockchain and cryptocurrencies were all about accessibility, transparency, equity, and participation, the implications would be revolutionary for the client-based niche of architectural practice and the impossibly high financial bar of real estate investing. Much of building industry is both inaccessible and ineffectual, which makes the entire ecosystem a pay-to-play situation.
And just over the last couple of years we are beginning to see major shifts in the building development world due to decentralized financing and smart contract governance. Today, we’re looking at the first big splash that crypto is making on our cities — tokenized securities.
In the context of this post, it’s useful to quickly describe what a security is for those reading this from non-financial industries. A security is a tradable financial asset and entails a right to ownership. This could be a pile of gold, stocks, cars, and even debt. To put it less dryly, check out this sketch from Napkin Finance -
We were really opened up to all of this when the well-known website Indiegogo announced their (now closed) asset crowdfunding platform. One of the flagship examples was the St. Regis Hotel, a property owned by Elevated Returns. In 2018, we interviewed both the Founder of Indiegogo, Slava Rubin, and the CEO of Elevated Returns, Stephane deBaets, on their motivations and expectations of blockchain-powered securitization.
“As of now, there are immediate benefits of using blockchain — increased liquidity, easier access to fractional ownership, and better security, making it almost a different kind of asset. I think this is the beginning of a movement for accredited investors and others to access in a way prohibited before.” — Slava Rubin
You can read the full interview [here].
So let’s dive deeper into why securing assets on the blockchain is a tremendous leap forward, particularly in the scenario of buildings and cities.
Stale Investment Networks
Securities have typically only pertained to objects and assets of high financial value since the paperwork and legal effort alone is enough to put off regulatory agencies from pursuing Pokemon card collections or rare Beanie Babies. This translates into a system that is only concerned with high value and highly appreciating assets, and does not have an incentive to lower the bar for smaller amounts of investment. Treehouse’s trailer outlines this specific problem very well in the video below:
The lack of liquidity stunts a global market and bars entry into investment opportunities for the vast majority of people. The complications concerning equity distribution, property rights, and general responsibility necessitate today’s status quo of lawyers, managers, and slew of other expensive and burdensome middlemen to keep things in relative order. Due to the high need for trust and intermediary parties, the market is simply not penetrable by non-accredited investors. Equity, as a result, becomes highly illiquid.
How then, can neighborhood residents in places of high growth secure themselves in their cities? With the value growth of properties far outpacing other economic drivers like salary wages and most alternative investments, no one short of homebuyers can escape being eventually pushed out of their current living situations. The lack of access, in this case, begets a lack of security in livelihood, making property assetization very distinct from other types of value storage and speculation.
Momentary Transfer of Equity
Besides the high barrier of entry due to price, securities have a number of off-putting ‘qualities’ that prevent individuals from wanting to participate in this part of the property economy. One of them is simply the time and attention needed to attend to these assets, referred to often as the “liquidity” of the asset. Can one buy and sell these assets easily and when needed? Can they be transferred without obstacle to friends, colleagues, and next-of-kin?
Bitcoin is heralded as one of the most liquid forms of money in recent time, allowing us to move any sum of money from our digital wallets to anyone anywhere in the world within a few minutes time. There is no need for bank support or approval, and we can move ‘digital gold’ between individuals as if it were cash in hand and on the table.
Securities on the blockchain undergo a process in which ownership is made into an “NFT” (non-fungible token) that makes it operate along the same lines as a cryptocurrency. Now, sending an Ethereum-based blockchain security to someone is equivalent to sending 1 ETH to someone through a cryptowallet. Imagine what this does to property-based securities, pairing proof of equity with proof of entry or access or accountability at any moment. This layers on a number of exciting benefits on top of the value itself.
This is significant because it makes many previous building program models obsolete. We would no longer need complex organizational investment structures like Timeshares to mediate between several property owners. The middle activity of managing timeslots and responsibilities would not be necessary with the high liquidity and programmability of crypto-based securities.
Trustless
And the lack of a middle authority leads the last point — trustlessness. As we’ve covered so far in the article, the heavy considerations of liquidity, regulation, high fees, and other barriers prevent potential users from partaking in building ownership and co-development. Much of this sunk time and cost is due to the necessity of third parties including lawyers, accountants, wealth managers, property owners, and many more. If guidelines and ownership were automated, there would be no need for situation-based consultation and user friction would be drastically reduced.
The popular mantra of developers ‘In Code We Trust’ has never been truer as with blockchain, leveraging smart contracts to make outcomes immutable and inevitable, buffered by the virtually impenetrable security of decentralization. Ensuring a particular outcome with extra fees and effort is an obsolete practice with the implementation of blockchain-fueled consensus.
Takeaways
Hopefully, this article managed the achieve the two goals of introducing how securities operate in the real estate sector and how cryptography and blockchain can change the game in terms of access and impact. A number of companies including Harbor are already beginning to deploy and manage property assets digitally on the blockchain. A decentralized real estate development market surely means more of the following;
TLDR: Why Tokenized Securities Matter
- Easier and faster infrastructure to own and trade real estate equity
- Greater access to stakeholders, globally and locally
- Tokens can carry more than one function across multiple applications
- A new kind of value; blurring lines between equity and payment
We’ll surely be seeing more creative and social innovations on the use of tokenized securities over the next few years, ones that transform what it means to ‘own’ a piece of property. It’s very exciting to witness the remodeling of real estate growth and ownership in a post-blockchain world.
If you’d like us look at any of the concepts listed above further, please comment with your suggestions below!
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