In real estate, hundreds of startups have launched in recent years offering blockchain and crypto services and there are many more in the works. The shared goal is to revolutionize every branch of the industry, from investment and finance to research and record keeping. And many of the companies sprouting up promise an end to fraud and the beginning of a golden age of transparency, security and access, with fewer intermediaries.
The nascent crypto sector has already started to evolve since its heady days, just last year, when the bubble of initial coin offerings (ICOs) grew explosively and virtually everyone wanted to know how quickly Bitcoin would make them rich.
Now the bubble has popped, insiders say, and the dilettantes have gone home. What’s left is the work of creating viable companies that bring value to the centuries-old real estate industry. Blockchain — a growing list of decentralized and incorruptible public records — provides a foundation for those companies to build on. And several longstanding real estate firms.
But while blockchain and crypto pioneers are scoring big wins in real estate, some of their projects and services can become fertile ground for inflated asset values, false marketing and fraud, according to multiple sources.
That combined with limited legal and financial guidelines and growing confusion — even among federal regulators — about how digital currencies should be classified, means blockchain and crypto enthusiasts may be in for a rude awakening.
One potentially innovative use of blockchain in real estate would be the tokenization of physical properties, allowing sponsorship to be broken into smaller and easily tradable fractions. Just as shares represent ownership in a company, digital tokens would represent stakes in a property or building portfolio, with the tokens’ values pegged to that of the assets. The tokens could then be bought and sold on secondary markets — disrupting real estate investment as we know it.
A legal framework for that could dramatically open up property markets, bringing liquidity to historically nonliquid assets and providing access to millions of investors who have been locked out by the high barriers to entry. It would change everything. Increased competition from millions of small-time investors would mean lower returns, but for a lot more people. It’s all going to erode back to an efficient market. But a lot more people will have access.
Of course, the slightly older crowdfunding industry promised the same universal access to real estate investment and never quite took off as expected. But crowdfunding also never saw the same level of mass appeal as blockchain. Over time, as more assets come onto the platform and as more investors get used to this idea, it will likely evolve into a marketplace.
The London-based Leaseum Partners is another company looking to tokenize New York real estate. The firm is partnering with Michael Chetrit of the Chetrit Group and launching a $250 million blockchain-based investment fund. The 10-year fund will be structured as a real estate investment trust, with digital tokens representing traditional shares, and will pay out quarterly dividends. Leaseum’s founder, Steve Sillam, said that in order to accommodate cryptocurrency skeptics, people can also invest directly in the fund, rather than buy tokens, and choose to get their quarterly payouts in fiat currency.
That is part of a much larger reality, since the only way for a liquid market of tokenized properties to evolve is with the right legal infrastructure. In order for blockchain and crypto to become sustainable, there will need to be more clarity over how the new financial instruments should be regulated and which agencies and laws should cover them. Not all tokens are created equal. Some digital coins, like Bitcoin, Ether and Ripple, were designed to function as currencies, though they’re more often used as investments. Asset-backed tokens, which are the newest iteration, are most closely linked to securities.
But many of the crypto coins launched by startups itching to raise cash have existed in the twilight zone between securities and currencies. A large chunk of them are similar to arcade tokens, which are needed to make the machines work but useless once you exit the arcade. These coins, often referred to as utility tokens, give the holder access to a specific platform or application and can also be traded on the open market. Initially, most crypto startups wanted to avoid the definition of their tokens as securities, so that they could launch ICOs without having to register with SEC. But as mainstream interest and regulatory scrutiny have both increased, it’s become much harder for these companies and their backers to fly under the radar.
In the meantime, the consensus among the legal community is to treat tokens as securities when possible, and many have taken to the phrase “security token offerings” — rather than initial coin offerings — when referring to new crypto financial products.
Since blockchain technology and cryptocurrencies are decentralized, sources say, they can be used for scams and even money laundering — despite claims to the contrary. While that growth is encouraging, there will need to be guidelines to protect investors as the market expands.
One concern is that crypto coins are often lumped together, making it hard to gauge what each one is really worth. Blockchain’s early years to the birth of the internet, calling blockchain a “truth machine” due to its protections against data tampering. Blockchain could be our first opportunity to refocus on truth rather than just information. In the real estate business that means better decisions, less friction on transactions and more transparency. That didn’t exist in the internet era.
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