Global Regulation Around Blockchain-backed Real Estate Investments & P2P Lending
Blockchain-backed real estate is a new phenomenon. Blockchain technology has only existed for nine years, and most of the developments during that period have been directed towards blockchain-based currencies, also known as “cryptocurencies” like Bitcoin and Dash. However, with the advent of smart contract capabilities on the blockchain and distributed file storage for legal agreement on the blockchain, new kinds of blockchain-backed products can be tokenized with legal agreements attached to them, allowing companies to issue shares, bonds, commerical paper and even fractional property ownership.
With this new technology, which involves monetary transactions to issue dividend and interest payments, as well as the enablement of payouts upon loan maturation dates or liquidation events, governments around the world have developed ways of regulating emerging FinTech to protect investors.
At Proof, we have developed easy-to-use tools for creating, purchasing and trading these kinds these new kinds of equity crowdsourced products and p2p lending vehicles. As the first company to publicly issue blockchain-backed real estate fractional ownership and commercial paper supported by notarized, authorizing legal agreements, we often receive inquiries around the regulatory frameworks we are operating within. The following is a country-by-country breakdown of the regulatory environments, our interpretations and our general strategies for approaching our nine primary markets, from Singapore to South Korea.
In regards to property, a guide to fractional ownership regulation in all 50 states can be found in Sirkin’s Fractional Ownership Regulation Guide. While all 50 states have different laws pertaining to property ownership, from the number of shares that can be distributed by own company, there exists the Federal JOBS Act (2012), which allows private enterprises to issue shares and other rights in their companies and advertise these shares on the internet. Under this regulatory framework, tokens issued on the Proof marketplace are tied to fractional ownership of a company, which is setup with the sole purpose of owning a particular property or fractional property ownership rights. This company is established as a C-Corporation, so that it can issue shares. A legal agreement that is referenced in the smart contract code, specifies that all funds obtained from a liquidation event of the property will be issued to users, after appropriate taxes are paid by corporation for capital gains. This corporation is only authorized to purchase a property or fractional property rights and zero funds are paid from the company in administration or management, so that token purchasers own a proxy to the real estate and do not incur losses potential aspects of the corporation.
In the case of shareholder (or token holder disputes), a terms of service entered into by users of the Proof Dashboard specifies that all disputes will be handled via arbitration and also that all events that occur within a blockchain-based smart contract are final. While this is not a bullet-proof mechanism for ensuring conflict resolution, we feel is a step in the right direction. We have a compliance and legal team that focuses specifically on methods to minimize legal conflict risks to token holders and Proof.
For properties located overseas that cannot be owned by foreign entities by law, such as for land (not condos) in many countries, we have developed the following model. As a smart contract generator, we allow any user to issue any kind of token on our platform. However, we only feature blockchain-backed assets for other users to find that meet regulatory compliance for our primary market in the United States. A user generated a token which also generates a shareable, private webpage that the user can share, peer-to-peer in order to facilitate a transaction. As a platform, if we are asked to remove such listings by government authorities, we will comply; however, because the assets exist on a decentralized blockchain, we do not have the capability of removing these tokenized smart contracts from distributed ledgers and users can still trade them. This is in part the beauty of blockchain technology. We can remain compliant while users have minimized risk over other mediums of tamper-records or lost currency.
United Arab Emirates
The United Arab Emirates has frameworks in place that allow fractional property ownership via companies registered in Free-Zones. For Americans token holders, an American company will be the partial owner of these free-zone entities. In the UAE, foreigners can only be property owners in freehold lands designated by the government. Proof will only feature and invest in properties located in these areas. Additionally, the UAE, and specifically the emirate of Dubai, has been one of the fasts movers to accept blockchain technology adoption. The government of Dubai has mandated that all government records exist on a blockchain by 2020.
The finanical services regulatory authority in our targeted emirate of Dubai is the Dubai Financial Services Authority (DFSA). With regards to peer-to-peer lending, the regulatory body has recently approved a peer-to-peer lending company, suggesting the embrace of peer-to-peer transactions. Before approval from the DFSA, Beehive operated for years before seeking approval, without hindrance, With regards to peer-to-peer lending on Proof, we plan to work closely with the DFSA as we provide more peer-to-peer lending opportunities on our platform. Before opportunities that are listed become searchable of users on the proof Dashboard, a rigorous screening process, involving notarized bank statements and credit history, of the company issuing debt is undergone by Proof and partner companies to ensure token holder protection and assurance.
There are different state-specific laws that apply to fractional property ownership. While India is not a primary market for users of Proof to purchase property from, a fast growing number of our users originate from India. There are capital requirements and other factors that companies must meet in order to operate as a peer-to-peer lending platform within India. As Proof grows, we plan to incorporate within India, meeting many of the requirements that are currently in place. Companies such as Bondora, which is based in Estonia, is open to international investors, including India, and does not have an entity currently in India. Following the lead of many such companies in this growing field, we plan to comply with any government regulatory calls for barring Indian users onto the Proof Dashboard; however, we plan to keep the Proof Dashboard open users of most countries, including India, unless notified to prevent usage in a certain company by a regulatory authority. Financial technology in India has been guided by RBI (Reserve Bank of India) and the regulatory authority is the ministry of Finance. In 2016, the P2P lending market was $199m, with much investment into the space as companies seem optimistic for a favorable regulatory environment for the financial technology sector, partially due to de-monitization policies.
Fractional property ownership has become popular in recent year, especially in the vacation cottage and ski resort property markets. In regards to equity crowdfunding, Canadian companies issuing tokenized equity must satisfy the following merits:
- The class of securities is low risk (ex. government and bank bonds);
- The investor can participate in the offering due to his or her wealth, sophistication or pre-existing relationship to the insiders of the issuing company (e.g. accredited investor exemption and close friends, family and business associate exemption); or
- A lesser level of disclosure is warranted given the risk, size of the company and the ability to impose suitability investment caps (e.g. the offering memorandum exemption and related eligible investor requirements)
Proof does not intend to issue tokens based in Canada. For companies in Canada that which to list shares of property or debt instruments on Proof, to be featured on the site (listed), must present notarized evidence to Proof of regulatory approval by the Financial Consumer Agency of Canada (FCAC) or similar agency.
For users based in Canada who wish to purchase tokens issued by international parties or Proof, financial services regulation is solely determined by the providence in which a user resides in. In Canada, if a company issues securities or other investment vehicles that Canadians can invest in, they must meet certain requirements and approvals, outlined in the Canadian Securities Regulatory Requirements applicable to Non-Resident Broker-Dealers, Advisers and Investment Fund Managers paper. Proof operates an investment company and platform for investors, not as a dealer, adviser or fund manager and therefore is outside the purview of most of these regulatory requirement. Proof does not plan to allow investment fund managers or dealers to become featured and searchable to users in Canada to comply with the law.
Fractional property ownership is legal in the United Kingdom. Additional owners who are not property owners are “registered on a structure that owns the property and [… ]get a share certificate stating” ownership.
The Royal Mint is an organization that is permitted by British law to strike coined currency in the UK. In 2016, the Royal Mint announced plans along with CME to issue blockchain-backed gold. The UK’s central bank, the Bank of England, has also stated plans of experimenting with a blockchain-based cryptocurrency. The UK government has acted favorably towards prospective blockchain solutions historically.
In the UK, regulation has been relaxed to the point that P2P lending platforms have often called for additional regulation from the monetary authorities in Britain. The Financial Conduct Authority is the primary regulator for equity crowdfunding and peer-to-peer lending. The FCA mandates that citizens of Britain cannot invest more than 10% of their net salary to equity and debt crowfunding campaigns. To comply with this regulation as Britian-based users of the Proof Dashboard must certify that they have not invested more than 10% of their net salary before purchasing a blockchain-backed asset token.
According to the Australian Securities and Investments Commissio (ASIC), for lenders to lend to entities in Australia, they must:
- Depending on the type of investment structure adopted (eg, managed investment scheme, issue of securities) the P2P lender will be expected to comply with all the existing legal requirements in relation to that structure, including holding an Australian Financial Services Licence (AFSL), and issuing applicable disclosure documents.
- If the P2P lender lends to individuals or strata corporations for domestic, household, personal or residential investment purposes, it must hold an Australian credit licence, and comply with the legal regime applying to licence holders, including responsible lending obligations.
As most Australian users will not hold the following licenses, we are restricting lending opportunities to Australian users.
Regarding equity crowdfunding of blockchain-backed assets, ASIC permits crowdfunding, but reserves the right to disallow investments upon review. To ensure assets investments are available to users, we work to ensure that the risk levels associated with underlying assets is well-documented and low-risk by performing our rigorous screening process for listed/featured investment opportunities. Additionally, we plan to work with the ASIC, sharing this information and inquiring on guidance or clarification suggestions to protect Australian investors from investment vehicles that could be disallowed by ASIC.
In 2016, the Korean government passed the Capital Markets Act which allows equity crowdfunding for companies no more than 7 years old, raising less than $600,000 USD. Proof works to create companies specifically for each property featured on the Proof Dashboard which owns less than $600,000 in property, preferred rights in properties located in Korea in order to comply with this law. For international investors, outside of Korea, their country specific laws will be applied to whether they are allowed to own stakes in these entities.
The regulatory authority of relevance to blockchain-backed property, company and other asset ownership, as well as financial transactions is the Financial Services Commission (FSC). In 2016, the FSB passed regulatory rules for investors within Korea, preventing them from acquiring more than $8,700 in crowdsourced debt or equities in one year. Proof plans to track asset purchases on the Proof Dashboard and ensure users who invest close to $8,000 are warned of this regulation before reaching the maximum investment amount per year allowed by the FSC. Tera Funding and the Korea P2P Finance Association are currently working to overturn this decision. There are currently more than 50 peer-to-peer lending platforms operating in Korea.
Under the Money Lenders Ordinance in Hong Kong, all p2p lending platforms operating in Hong Kong must receive a license to operate. Proof plans to comply with this by preventing lending opportunities to Hong Kong users until expansion leads to registration and obtainment of a license by the the Securities and Futures Commission (SFC).
In regards to equity crowdfunding, users in Hong Kong are allowed to purchase shares of domestic and foreign entities; however, the SFC has been working to introduce new regulation in this area. We plan to work closely with the SFC to create a safe environment for investors and a thriving environment for the industry.
The Monetary Authority of Singapore is responsible for regulated the financial services industry in Singapore. Issuers issuing less than $5m in securities over 12 month periods do not require preapprovals or presentations of prospectus submitted to MAS. Proof does not plan to acquire or list properties based in Singapore in the immediate future; however, it is a favorable environment for future expansion, especially with its embrace of blockchain technology in the financial services industry. Intermediaries that operate as crowdfunding platforms must meet a requirement of net cash assets totaling more than $50,000 in Singapore, which Proof currently qualifies for.
Regarding P2P lending, all p2p transactions are subject to the Moneylenders Act 2010 and 2009. These acts protects borrowers from predatory lenders and falls outside of the operations of Proof. All money lenders or operators must register a prospectus with MAS in accordance with Section 239(3) of the SFA. As we expand into Singapore, we plan to register our prospectus. Singapore government has acted favorable to innovation in the p2p lending and equity financing industry, with he government investing heavily into innovation in the space.
We plan to comply with any notices by the Singapore government. Upon approach by the MAS, we plan to setup a Singapore entity as a PLC in the event it is requested and as our userbase in Singapore grows in that region.
As can be observed based on the summary of these countries’ regulatory environment around blockchain-backed assets, rules vary from country to country, with certain places such as the UK being highly deregulated with favorable regulatory bodies, while countries such as Australia have highly unfavorably laws to some but not all kinds of crowdfunding activities. In some areas, such as India, the regulations are still unclear, while others are highly specific, such as in South Korea.
All in all, the strategy at Proof is to launch globally with these regulations in mind and work closely with regulators to ensure the best protections for users, forging a path ahead for the industry as a whole.