In recent times, the financial market has been abuss with discussions about the potential benefits of real estate tokenisation. Several initiatives worldwide, such as Propchain in Dubai, Vave and Equisafe in France, Propellr, Inveniam Capital Partners, and Fluidity in the United States, as well as Elevated Returns in the United States and Thailand, have taken the bold step of launching tokenised real estate projects. The advantages of tokenisation, including enhanced liquidity and the democratisation of investment, have been widely acknowledged. However, the true obstacles to achieving "real" tokenisation of real estate are not discussed as frequently. In this article, we will delve into some of these fundamental blockers.

True Ownership

Traditional real estate ownership is recorded on central registries designed for conventional ownership structures, usually involving one or two legal owners and a limited number of beneficial owners. Tokenised real estate projects can take two primary approaches: issuing NFTs (Non-Fungible Tokens) to represent individual bricks or creating divisible proportionate shares of ownership. The latter option makes tokens more fungible, but current title registration constraints limit the feasibility of this approach. True tokenisation aims to overcome these traditional ownership structures.

Transfer of Ownership

Traditional real estate transactions require formal, often written (a necessity in England and Wales) contracts, transfer agreements and payment of transfer taxes. In contrast, tokens can be transferred without incurring stamp duty or other taxes. However, registering such transfers could trigger tax obligations.

Characterisation of Ownership

The nature of a token's classification hinges on the rights and obligations attached to it. Transferring real estate ownership is not considered a "financial services transaction," but handling financial instrument transfers is. Determining the classification of tokenised assets has regulatory implications for intermediaries, offerors, and trading platforms.

Market Structure

The real estate market traditionally involves bilateral transactions, sometimes with intermediary agents. However, most cryptocurrency or token transactions happen on electronic crossing networks or broker platforms. Existing title registries are not equipped for these modern transaction methods although we are now seeing some registries experimenting with this type of software.  For example, HM Land Registry used the Corda platform in 2019 to create an end-to-end proof of concept to demonstrate the benefits of a fully distributed network, repeating in 10 minutes a real-life, traditional transaction that had taken 22 weeks to complete.

Changes in Law

Achieving true tokenisation of real estate would necessitate substantial legal changes to accommodate this shift. This is a long-term undertaking, as it involves reshaping existing legal frameworks to accommodate digital tokens representing real property. Clarification of the status of tokens is required for widespread adoption, particularly if that clarification concludes that tokens take effect as units in collective investment trusts, with the additional financial regulation that entails.

Cross-Border/Jurisdiction Issues

Tokenised real estate offerings may be regulated differently in various jurisdictions. What's acceptable in one jurisdiction may not be in another. Issuers and intermediaries must adapt to the varying regulatory landscapes.

Trust

Tokenised real estate offerings vary in the degree of ownership they confer to investors. Some offerings resemble contracts for difference (CFDs) rather than true ownership. This distinction impacts investor rights and obligations in case of insolvency, requiring transparency from issuers and intermediaries.

Why Traditional Structures Fall Short

Achieving true tokenisation can involve offering shares in a special purpose corporate vehicle (SPV) that owns the real estate asset. These shares can be digitised on a distributed ledger, depending on the jurisdiction and offers the benefits of liquidity, accessibility, and the potential to securitise assets, leading to cost savings and democratised investment opportunities.. The question for the market is why or if this is not sufficient: it delivers the opportunity for fractionalised ownership within the existing registration and title transfer framework. On the other hand, it is not true tokenisation as the digital natives consider this to be. 

Conclusion

In conclusion, tokenisation of real estate has the potential to revolutionise the real estate market, offering significant benefits for both wholesale and retail investors. It has the potential to prevent liquidity crises, reduce costs for consumers, and create opportunities for fractionalised ownership. However, the road to true tokenisation is paved with significant challenges and regulatory hurdles that vary from one jurisdiction to another. Market leaders must navigate this evolving landscape cautiously and ensure transparency in their offerings. As the industry matures, it holds the promise of transforming the way we invest in and transact real estate.