Some assets like real estate are not easily accessible by investors as those are complex to acquire and require large investment. Asset tokenization allows electronic trading of fractionalized ownership of assets other than just stocks, funds and bonds; it facilitate investors access to illiquid assets (tangible or intangible). Tokenization is the process of converting units/shares/debt of an asset into a digital token on a blockchain.
Why tokenization could be a game changer in real estate and infrastructure industry?
Project Financing
For real estate and infrastructure asset owners, a lot of capital is required to build or acquire assets. Traditional value chain leverages institutional investors, typically located in the region where the asset is. Tokenization allows access to global markets, and its fractionalization allows access to retail and high net worth investors, not only institutional.
Asset diversification
For retail and high net worth investors, it is complicated to diversify their investments into alternative investments like real estate with the traditional value chain. Tokenization opens new opportunities to access alternative assets managed by trusted and reputable asset managers. Tokenized assets can represent a group of assets into a fund, or be a single asset (Renowned hotel, building, powerplant, airport, …) and receive periodically a share of the profits, like dividends/distributions on a stock/fund.
Liquidity
Real estate and infrastructure assets are not liquid assets since transactions on those assets are rare and typically, a large portion of the ownership needs to be sold at once. Evaluating the current market value of a real estate asset is challenging. Finding a buyer/seller is always a long process. With tokenization, a small fraction of the asset can be traded; owners and buyers can indicate their interest with their bids and asks. Tokens can be easily traded and settled 24/7 as the transactions are recorded on a blockchain, and managed by smart contracts.
Increased efficiency
Since the tokens are traded on a blockchain, the exchange of tokens and money between the buyer and seller’s digital wallets is settled very quickly and securely using the blockchain cryptographic attributes. The registry of token holders is also always up to date using the on-chain token holders and off-chain KYC information.
"Tokenization is the process of converting units/shares/debt of an asset into a digital token on a blockchain."
Asset managers operate the asset in exchange for a management fee. They can effectuate periodic distributions easily and very economically to token holders directly into their digital wallets.
Regulations
Asset tokenization refers to a Security Token. This makes the regulatory requirements aligned with the requirements of securities and is subject to the issuance of a prospectus and associated obligations such as KYC (Know your client) and AML (Anti Money Laundering).
At issuance of a new security token, proper KYC on investors must be done by the issuer, and investor information can be kept using traditional trusted methods (off-chain). The digital wallet (Public Key) associated to an investor is then whitelisted by the issuer into the blockchain smart contract to allow transactions.
Is this safe?
Since asset tokenization leverages a permissioned smart contract (i.e., only whitelisted digital wallets can buy and hold the tokens), this is very safe. In the case of an exploit of the blockchain or smart contract, the security token issuer can halt transactions and burn (destroy) tokens that were compromised, and reissue new tokens to the proper owner as per information off chain (Ex: KYC).
How complicated it is for investors unfamiliar with blockchain or cryptocurrencies?
The asset manager (token issuer) can simplify the process for investors in creating an intuitive web page simplifying the investment into a new issued token. Investor can consult the prospectus, see pictures of the asset being offered. Payment can be done to the issuer using traditional currencies and cryptocurrency payment methods.
For secondary market, a marketplace web page can also be offered by the issuer to facilitate the buyers and sellers that have already cleared the KYC to meet with their offers. In this case a proper web page is required to allow investor to connect their digital wallet with associated tokens to be sold or stablecoin (cryptocurrency that replicate USD or other traditional currency) for the acquisition of a tokenized asset on the secondary market. If the selected blockchain by the issuer is a global public one, tokens could even be traded into global exchanges in the future and be available for DeFi transactions like lending and borrowing.
Even if the asset tokenization is still in its infancy, we can see the benefits for both the asset owners/managers and investors. As with any innovation, it may feel peculiar at first, but once the proper digital infrastructure is set up, with intuitive user interface, we foresee mainstream adoption. Multiple exciting projects have been launched recently, which demonstrate the efforts put into building that infrastructure.
It remains that the reputation of the asset manager that is the issuer of a tokenized asset is critical as the risk of a fraud or mismanagement of the asset is always possible, like today, without the usage of blockchain.
