Real estate tokenization: what it is and how it works

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Real estate tokenization: what it is and how it works

The real estate industry is undergoing major changes, particularly due to the development of new ways of buying and selling. The real estate tokenization Is part of these.

Tokenization means converting tangible assets of the physical world, e.g., land and property, into digital tokens on a blockchain.

Each token can be regarded as a share in a company, just like those that can be bought or sold on the stock exchange. The token, however, has some relevant differences: it is an easily transferable and storable digital tool.

It can be said, therefore, that even in Italy where the real estate sector is always very active, it is taking more and more shape this innovative approach that is transforming the conventional understanding of real estate and real estate investment.

This article looks at various elements related to real estate tokenization to understand how and whether it can be achieved, including the regulations governing it.

Real estate blockchain: what is meant

There has long been a solution related to many areas that seems to be more effective than others: the Blockchain. This is an innovative technology that is also a perfect match for real estate.

What is it all about? Specifically we refer to the blockchain real estate to speak of a digital, decentralized ledger consisting of numerous blocks in which each is uniquely identified and links to the others in a cryptographic chain that is almost impossible to tamper with.

It is, in fact, a highly secure technology primarily because each transaction is placed within a block containing other transactions, cryptographically protected and linked to the preceding blocks as well as to the following blocks in the chain.  

Tokens and smart contracts in real estate

Whatever type they are, the buying and selling of real estate are always something very profitable. This has also been understood by those in technology, devising new horizons for the brick market.

With tokenization, concepts such as. tokens and smart contracts, closely related to each other. Let's see what it is all about:

  • Token. This definition refers to a unique piece that finds its way onto the blockchain. It is, therefore, a security of wholly digital property. It can be regarded in the same way as an equity share in a company, just like those that can be bought or sold on the stock exchange. The difference is. That a token is an easily transferable digital instrument and preservable.

  • Smart contract. Smart contracts are software based on the blockchain that unlike traditional ones, are consisting of a cryptographic code and are used to Automate the execution of an agreement. In this way, all participants can be certain of the outcome without the need for intermediaries. More simply, smart contracts reinforce agreements between parties, allowing rules to be automatically enforced without the need for lawyers or courts, as is traditionally the case.

Real Estate Tokenization: how and why

In property tokenization, an asset is divided into fractions with the help of a smart contract. Each token represents a actual title held on a blockchain, that is, the certified residence of the title itself.

Anyone who purchases and owns a token has a real claim to the property to which it relates.

The reasons for choosing to proceed with this solution are:

  • Opportunities for small investors as well. Unlike in traditional real estate, here entry is allowed even for small investors who do not have large initial sums to use.

  • Ability to create liquidity. Through blockchain technology, tokens can be transferred easily and with great security measures that are difficult to tamper with. This allows investors to improve portfolio diversification and mitigate risk.

  • More efficient transaction. Efficiency seems to be a major motivation, because tokenization by eliminating intermediaries such as brokers and real estate agents, revolutionizes conventional transactions by making them inevitably more fluid and efficient.

Transparency. Blockchain offers greater transparency and security in the transactions that are recorded in a way immutable and permanent on the same.

Can you sell home online with tokenization?

Selling home online in the proper way with tokenization is not yet possible, due to the rules governing the buying and selling of real estate, however, something very similar can be done.

What can be done is something close to real estate crowdfunding, which, being a long-term financing tool, allows the owner of a share to get proportionately the expected profits from the probable sale of the property.

Real Estate Tokenization Regulations

Real estate tokenization is controlled by the DLT regulation, better defined as EU Regulation 2022/858 thanks to which the possibility of buying houses through tokens will be at least closer.
The regulation will allow the development of crypto-assets that fall under the definition of financial instruments and, more generally, that of blockchain technology.

Nothing is certain yet, but the industry is making great strides to make real estate tokenization a reality, just as traditional buying and selling are.

 

For further clarification related to standards and blockchain, legal advice can be obtained from Crypt&Co

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