A house on a blockchain?
That’s the future a number of initial coin offering (ICO) issuers envision, one in which tokenized pieces of the property could be tracked and traded via a shared database. In this way, the tokens would allow for what entrepreneurs are calling “fractional ownership,” or the ability for a real estate owner to split up their home and sell off equity stakes.
Not only would this allow a homeowner to sell some of the home’s equity should they need extra money, but it would also allow the equity to be freely traded until, one day, the home was sold, at which point the homeowner and equity owner could both enjoy any gain in the home’s value.
It’s notable a trend given the excitement the concept saw among earlier blockchain startups that were building businesses around private or permissioned blockchains. But this new round of hype comes from token sellers who believe the crypto token model, in which a digital asset is sold and traded, could bring benefits to perhaps the most fixed of the fixed assets markets.
In fact, there are at least four ICO issuers right now with a real-estate component – BitRent, a way to speed up financing construction projects; Etherty, real-estate management through equity access; Caviar, a fund that tempers the volatility of crypto investments with loans to real estate projects; and Trust, a way to tokenize equity in real estate and other real-world assets.
No doubt, there will be more.
Compound VC’s Joshua Nussbaum expressed measured excitement that was representative of responses from crypto investors CoinDesk surveyed.
Nussbaum said:
“If done responsibly and legally, I do think these types of projects can advance the industry by offering previously inaccessible liquidity and investment opportunity to individuals.”
And Nussbaum isn’t alone in his thinking.
“We will undoubtedly see tokenized real estate securities in 2018,” Prof. Stephen McKeon of the University of Oregon told CoinDesk.
Yet, even with new momentum for this particular token use case and increasing interest by consumers and businesses in cryptocurrency, there are still hurdles to tokenizing real estate on a blockchain.
Liquid land
The concept of selling shares of a property is nothing new – real estate investment trusts (REITs), modelled after mutual funds, own and manage properties, allowing investors to buy in for small amounts.
But with a public blockchain, these practices become more efficient and cheaper, according to the entrepreneurs and interested investors in this space.
“Using blockchains, you can securitize any asset for 1/100th the cost,” Multicoin Capital partner Kyle Samani told CoinDesk.
And not only that, but tokenizing home equity could also make the space, which has been attractive to investors but difficult to trade, more liquid.
Scott Hoch, an analyst at Apex Token Fund explained, “A new level of liquidity is created when tokenizing traditional assets. This liquidity makes it faster and easier to rebalance a portfolio as the market changes.”
Coming out of 2017 with its dramatic market gains, there are probably many crypto investors, surprised by how much they’ve gained, who would like to lock some of it into more stable assets, but Hoch believes they’ll still want the investment instrument to be tokens.
Just like mobile-first internet users are less eager to use laptops, Hoch argues that crypto-first investors will prefer tokenized equities over selling to fiat and buying into traditionally structured funds, never mind actually buying a property outright.
“Tokenizing assets that are uncorrelated with the cryptocurrency market gives these investors a way to achieve diversification more quickly and without having to leave the blockchain ecosystem,” he said.
And traditional investors may well follow.
“Think about what goes into paying dividends: identify all shareholders, have a bunch of bank wires in the background and file a bunch of paperwork. This can all be done in a smart contract,” Multicoin Capital partner Tushar Jain explained, adding:
“Tokenizing securities is a massive infrastructure upgrade for the global financial system.”
Legal hurdles
Still, there are serious hurdles to crypto real estate’s success.
For one, the laws around real estate are highly complex. In the U.S., each state handles record-keeping differently, said Howard Rubin, a real estate lawyer with Goetz & Fitzpatrick who’s represented Fortune 500 companies. And in the developing world, tracking titles for land ownership is hardly handled at all, as CoinDesk has previously reported.
So, Rubin doesn’t expect real estate to integrate well with the token economy anytime soon, although, that isn’t to say it never will.
“There has to be a lot shaken out in the blockchain world,” he told CoinDesk.
On top of that, some believe bringing crypto to real estate could introduce some of the magical thinking that drove the housing market, and seeing similar exuberance here could pique the interest of lawmakers and regulators.
Nussbaum acknowledged the danger, saying, “The risk is that irrational exuberance sets in and those investors don’t fully understand what they’re buying.”
Arianna Simpson, the founder and managing director of Autonomous Partners, echoed that sentiment, saying, “I don’t believe most members of the public currently have a strong enough grasp of how this works to fully understand or trust the system.”
As such, while the crypto investors CoinDesk spoke to found the concept intriguing on a thought exercise level, none of them had actually invested in a crypto token focused on disrupting the real estate industry.
Summarizing the concerns, Professor McKeon said:
“Widespread adoption as a financing vehicle is further off, partly because [crypto tokens] are untested in court and partly because it takes time to shift cultural norms.”
Tokens at the town hall
Yet, there are signs that the right people are taking an interest in crypto tokens for real estate.
According to John Mirkovic, a deputy recorder at the Cook County Recorder of Deeds, which oversees properties in and around Chicago, his office believes private parties can transact using a blockchain today.
“That being said, we are already getting to work in Illinois on statutory changes that will pave the way for a system where the transfer of a token is both the conveyance and the public record in one event,” he said.
Not only is Cook County interested in updating the law to accommodate crypto, but a handful of locations – a city in Vermont being the most recent – around the world have launched pilots to determine whether putting land titles on a blockchain would offer efficiencies and other benefits.
While Mirkovic suggested that investors look to the established REIT system before jumping into crypto, he said, “Experimentation with new ways of doing business, especially in the spirit of inclusiveness and transparency, is always a good thing.”
Be that as it may, Rubin said these kinds of efforts for smoothing the path for crypto real estate will take a while.
He added, though:
“I’m not saying in five or 10 years it won’t happen.”
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