The Capital
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The Capital

Real Estate is Next in Crypto Play

Real estate is the biggest asset class. When you combine predictable cash flow, value appreciation, inflation fighting, and investment return, its hard to beat real estate. But finally there is fundamental shift in real estate investment that will make it better and more inclusive.

Pizza menu ready. Popcorn, chips, salsa, cookies, Häagen-Dazs in multiple flavours, lock and loaded. Beer is on hand but we will probably need something more industrialized — the brownie guy. Check.

The great political experiment that is America is about to enter the final stages of a nail-biting election. What does it mean for democracy, the cherished offspring of the ancient Greek pathos? But I tell you what. I don’t care whom you voted for but my hats off to those who have stood for hours in the long lines to cast their ballots.

The Oxford dictionary defines Democracy as, “control of an organization or group by the majority of its members.” In a way, that is what the crypto movement is all about. An experiment of finance based on decentralized and open consensus by the people for the people.

Whoever is elected tomorrow, the way assets are invested are about to fundamentally change with tokenization. This can mean any tangible asset: art, baseball cards, automobiles, etc. But I am talking about the mother of all assets — real estate. These assets would be issued in the form of security token offering (STO).

But before I start, it’s important to distinguish between STO’s and its analogous counterpart, the ICO. The latter was a good idea in that a red-tapeless mechanism was used to raise funds for ventures. However, without regulatory guidance, the ICO was fraught with fraud-laden schemes. Not all were conniving schemes but enough that the ICO term has a negative connotation.

STO’s is the tokenization of an asset in the process of issuing blockchain tokens. It’s the securitizing of the asset into token form. And hence, the big difference in an STO is that it is backed by real assets, and not just promises to build a venture. STO’s, when applied to real estate, because they concern legal deeds and ownership, are regulated.

Why is Real Estate STO Better?

When the dotcom boom started, everything was dotcomized. Selling toys to your pets using a sock (pets.com, etoys), getting groceries sent to you in a van (Webvan), and funny, internet money (Flooz), were all abject failures. The last one sounds promising though. But is STO a hammer to which everything looks like a nail? No. Definitely not.

Real estate is one of the most important asset classes that can yield high returns, is fairly stable, and is not only an excellent defense against inflation, it actually benefits from it. But real estate has a barrier to entry. Especially for stratified markets like Hong Kong, London, New York City, Vancouver, San Francisco just to name a few.

Real estate, when tokenized is highly divisible which makes it more accessible to the masses which traditionally could not participate in high value markets. As the real estate saying goes: location, location, location. By having a wider investment audience, you also improve what has fundamentally been real estate’s biggest drawback — the lack of liquidity. STO’s will certainly improve liquidity.

Real estate transactions will also be more efficient in a few ways. First, the transfer of real estate in the form of STO eliminates the need for lawyers. I am not saying that you should not consult with legal advice, you should, but rather the need is optional, and because the offering will have gone through regulatory standardization, the cost of legal counselling would be considerably less if one chooses to do so.

Additionally, administrative costs, such as management, rent collection, insurance would be baked into the smart contract automating many of the processes.

I want to wake up In a city that never sleeps

Challenges

For STO to gain a foothold, the big issue revolves around regulatory buy-in. Blockchain-based platforms are inherently decentralized. Security regulations surrounding the issuance and re-selling of STO’s would require regulatory oversight. This complicates the market if it would attempt to become more global, which is one of the major selling points of STO’s. It will still be a challenge to get jurisdictions to play together. For tangible assets, this is vital as the actual ownership of the underlying asset needs to be properly administered. One solution that could circumvent this would be the establishment of a trust and escrow company which would be responsible for ensuring that the assets are indeed backing the STO. This may be easier than getting multiple jurisdictions in agreement but it would also dilute the decentralized nature of the original premise.

Is STO the New Name for REIT

REIT and STO share similar characteristics. REIT’s have certain legal restrictions. By definition REIT is actually equity (stock) ownership of a corporation or trust that has significant ownership in real estate, usually at least 75% of its assets invested in real estate. So, whereas REIT represents ownership in a company, STO’s closer to direct fractional ownership. Whereas in an REIT, an investor fractionally owns part of a portfolio in real estate, STO’s would represent a stake in a specific property.

Summary

STO for real estate is probably one of the most ideal use cases for tokenization in general. Successful STO’s have been issued and trading already. The market is still in its infancy as regulatory partnership is still in the works. But Singapore, another high-price market, is taking the lead as other markets are carefully scrutinizing how the STO market should play out. I am fairly certain that this market will grow as there is any underlying need to both increase liquidity and to bring the real estate market to a wider audience.

And if you are an American, please remember to vote. Thank you and be safe.

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