I would like to know what you think about the real estate market as a globalized and interconnected medium.
In the coming years, the way people hold and transfer assets are going to change dramatically. If you own any real estate, equity, derivatives, commodities, or even debt - The ownership on these assets is more than likely to be recorded on a distributed ledger (blockchain) and be represented by security tokens.
But hey, don’t take my word for it. Let’s look at 3 examples that back up these claims.
- Deloitte, one of the largest consulting companies in the world published a report about the future of commercial real estate. In the report, Deloitte refers to a survey that was conducted in the World Economic Forum. In the survey, more than 50% of 800 executives and IT experts said they think that more than 10% of the global GDP will be stored on a distributed ledger by 2025. (source: Deloitte - Blockchain in Commercial Real Estate).
- David Sacks, former COO @ Paypal, gave an interview to Fortune magazine recently, where he predicted that real estate will be the vanguard for a market where all sorts of assets, from fine art to shares in private funds, will be tokenized on a distributed ledger". (source: Fortune/David Sacks Interview).
- In the Australian state the New South of Wales, the government is determined to make conveyancing (the action of preparing documents for the transfer of property) electronic by registering property information on a distributed ledger to make the practice of ownership transfer cheaper, more reliable, and more secure. (source: ZD Net by CBS - Land Registry to Trial Blockchain for Conveyancing)
So, while there are different types of securities that are going to be registered an transferred on a public ledger, from now on I will focus on the commercial real estate (CRE) asset class.
Here are some reasons why I (and many others) believe that security tokens are superior to traditional methods of recording and trading CRE ownership claims. I will also explain why I think security tokens will see widespread adoption in the coming years.
1. Fractional Ownership - CRE, in particular, is characterized by a high unit price. It is an asset class that is usually available only to HNWIs. Most first-time real investors can't come up with the resources required to acquire a Manhattan high rise, for example, so they are left with two options: Give up on the idea of investing in CRE altogether or gain exposure to this asset class through an intermediary, like a publicly-traded REIT. This type of investment, however, is often bundled with a portfolio of other buildings of varying quality and characteristics. Security Tokens offer an efficient way to fractionalize a single high-value asset. As more assets are fractionalized, investors will come closer to being able to construct a truly diversified real estate portfolio.
2. Proof of Ownership - In CRE, after all the shares of a certain project have been issued, there is a lot of administrative costs around ownership reconciliation. Except for these added costs, companies also run the risk of human errors, which can only make the reconciliation process more costly and hurt investors' returns. To better illustrate these risks, you can look at the story of Dole Foods in this Bloomberg article. Security tokens allow contractual features such as liquidation preferences, ratchets, and drag-along rights to be baked into the securities, eliminating unnecessary costs for investors.
3. Automated Compliance - The case for tokenized securities often revolves around removing frictions to trade, and one of the most complex frictions is adhering to regulations. It is complex for at least two reasons:
- Regulations can vary along multiple dimensions such as asset type, investor type, buyer jurisdiction, seller jurisdiction, and issuer jurisdiction. Each of these dimensions has numerous regulatory permutations and multiple regulatory agencies that govern trade.
- Regulatory compliance is typically documented through a series of separate ledgers, each constructed by entities that facilitate issuance and/or secondary market trade. It is only through reconciliation of these ledgers that ownership and compliance are legally validated. In this environment, maintaining compliance adds latency and cost to trade, segments markets, and reduces liquidity.
A key feature of blockchain-based security tokens is that they are programmable. This means that many elements of the contracting environment can be hardwired into the architecture of the security. When securities are tokenized, compliance can be automated, which means that regulated trade is no longer restricted to walled gardens. Furthermore, baking compliance into the token can help market participants navigate the extremely complex task of selling securities across borders.
Security tokens make compliance so frictionless that, I believe, regulators will begin requiring securities to be tokenized. This is not as far-fetched as it might seem — there is a precedent for mandates from the SEC for technology adoption. As far back as 1996, the SEC required electronic filing of financial statements through EDGAR , and later adopted XML technology. You might recall that public adoption of the Internet was only just beginning in 1996, so the SEC was ahead of the curve in this respect. There were only 36 million users on the Internet in 1996, or 0.9% of the world population. This is not far off the adoption rate of blockchain today. Coinbase alone has over 20 million accounts as of this writing.
4. Optional Early Liquidity - Most private assets are relatively illiquid, which means the ownership interests are costly to trade. For private assets like an LP interest in a VC or private equity fund, exiting the position before fund liquidation can involve deep discounts, and often require GP approval. In both cases, investors get hurt. With security tokens, the ability to devise the high-unit-cost of these assets automatically puts them within reach of most retail investors. Additionally, with the emergence of security tokens exchanges (like tZero and OpenFinance), investors can easily access liquidity in the secondary market. A deeper market for the ownership interests and the increase in investor liquidity is expected to be accompanied by an increase in value.
If anyone has any correction or comments, let me know. This space is fairly new, and I don't pretend to know everything!
Gal, are you still a member of BP. I am interested in a discussion. I am less positive about how well blockchain is going to change the rules of the game.