5 Questions: Democratizing commercial real estate through tokenization
- March 1, 2022: Vol. 9, Number 3

5 Questions: Democratizing commercial real estate through tokenization

by Mohsin Masud with Mike Consol

In abstract terms, tokenization takes a tangible or intangible object and converts its value into a token that is stored on the blockchain. As such, tokenization can turn basically any asset, whether real or virtual, into a digital token that enables digital transfer, ownership and storage without the necessity of a centralized third party or intermediary.

But why tokenize real estate?

Mohsin Masud, founder and CEO of AKRU, an online real estate investing platform using blockchain technology, is energized about this new and emerging practice.

What are the advantages to tokenizing real estate?

The main benefit of tokenizing is the ability to fractionalize ownership of an illiquid asset such as real estate. Tokenizing real estate property brings the potential for greater liquidity and lower costs to investors who want to get involved in the commercial real estate investing industry. It also democratizes the real estate investment space by opening it up to allow more people — specifically those who aren’t in a place to commit $50,000 to $100,000 at a time — to invest. Tokenization of properties breaks large, expensive investments into fractional slices, creating a security token for each piece. This process allows for the possibility of more liquid and secure secondary trading of tokens that simultaneously fall well below the minimum spend thresholds for many investors. The process of tokenization as a whole offers both issuers and investors some advantages over the existing investment options for real estate and may create more opportunities for a larger number of prospective investors to enter the market.

Where does the tokenized record exist and how is it secured?

Blockchain is the underlying technology of digital currencies and tokens. In basic terms, blockchains are records of data stored and managed on networks of computers around the world called nodes. Transactions using a blockchain are recorded on a digital ledger that is made available to everyone else in the blockchain network. Once data has been recorded onto a blockchain, it cannot be changed or altered in any way. This recording process is achieved by using cryptographic algorithms. The security of these layers of encryption is what makes blockchain such a popular technology. It is an immutable public ledger and nobody can question or forge your ownership. The use of security tokens, and multi-signature wallets work together to complete the unchangeable record of ownership recorded on the blockchain and reduces the likelihood of fraud.

What are some of the challenges surrounding tokenization?

Regulatory alignment can be a challenge due to security regulations that can vary substantially based on jurisdiction. Although the regulation of tokenization can be difficult at times, specifically for fintech companies looking to implement innovative new tech, it is moving in the right direction. Many companies understand that having a clear framework of regulation for tokenization is an important step for the development of the tokenization economy.

How significantly are tokenized real estate assets growing?

According to MarketsandMarkets, the global tokenization market size is expected to grow from $2.3 billion in 2021 to $5.6 billion by 2026. Tokenization is extremely convenient and economical, which will be the driving force for its future growth. Property tokenization is also one of the most promising use cases of blockchain technology as it is a more valuable asset class than stocks and bonds combined, according to INVAO, a financial services provider for the management of digital assets. Fractionalized ownership of real estate assets gives investors more options to diversify their portfolios. The friction of buying and selling assets is reduced to near zero. Most importantly, tokenization may open real estate investment to a much larger audience compared to other direct investment strategies such as REITs. Another driving aspect of tokenization’s predicted growth is its ability to reduce the risk of data breaches. As companies using credit and debit cards can easily be targeted due to the wealth of payment information stored, tokenization can help protect businesses from the financial impacts of data theft.

Are there any innovations on the horizon in this space?

There are a number of cutting-edge technologies headed to the market in the coming years. Blockchain, specifically, is shaking up investing as companies establish new trading platforms using tokenization to create more opportunities for young investors to enter the market, thereby democratizing markets that were once the exclusive domain of the ultra-wealthy.

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