Tokenisation of real world assets (RWA) - the process of representing physical and financial assets as digital tokens on a distributed ledger such as a blockchain – is often cited as an exciting real world use case for blockchain technology. Advocates say it has the potential to unlock and diversify economic opportunity by creating greater liquidity in and access to private assets.
The Financial Times has reported that US investors are testing the waters in real property tokenisation, which slides a house or hotel into digital tokens that represent ownership, and gives would-be buyers the ability to hold a digital sliver of a bricks-and-mortar building.
It is gaining popularity among crypto fans seeking new areas in which to invest their funds and use blockchain technology — and as high house prices in large cities like London and New York make investing in property outright increasingly unaffordable for many. Real estate tokenisation offers a lower threshold to invest, and investors can benefit from the potential to rise in property value and incoming rents.
US Property tokenisation companies such as Lofty, RealT and HouseBit offer a range of buildings to invest in, using either cryptocurrency or standard bank deposits.
Founded in 2018 in Miami, Lofty is backed by the Silicon Valley start-up incubator that spawned companies including Airbnb and the crypto exchange Coinbase. Property sellers list their buildings on the website and Lofty creates a company registered in Wyoming for each one, making tokens representing the ownership, each valued at $50. Each token will also hold information such as the asset’s ownership history, trading and regulatory details, and the tokens live on a blockchain, which essentially acts as a digital record keeper. Calling itself the "NASDAQ For Real Estate", Lofty has tokenised more than 181 properties to date.
Compared to more established investment products like real estate investment trusts (REITs) which typically own or finance large groups of commercial and residential buildings, some argue tokenised real estate promises a more tangible way to invest small amounts in individual properties. Jerry Chu, founder of Lofty says,
Real estate is a very emotional asset class… REITs exist and funds exist [but] people seem to be a lot happier about ownership when they can say, ‘It’s this address, I own it because of these reasons.’
In Australia alone, Digital Economy Council of Australia (DECA) reported that RWA tokensiation can unlock up to AUD $12 billion per year in potential economic gains. Globally, McKinsey and Boston Consulting Group estimated that tokenising illiquid assets could create a market worth between $2tn and $16tn by 2030 - tokenised home equity alone could be worth $3.2tn, and allow investors from around the world to hold slices of illiquid assets that are otherwise difficult to own.
Meanwhile, tokenisation is also taking off on Wall Street — BlackRock and Fidelity International are among the asset managers exploring tokenising funds in order to make it cheaper and easier to move assets, though these are largely only available to institutional investors only.
However, RWA tokensation remains a legal grey zone in many countries including Australia. Australia's current regulatory regime premised on paper or centralised ledgers and centralised intermediaries presents an obstacle to unlocking the ownership economy and allowing access to concentrated private markets.
DECA argues that a primary barrier to realizing this potential Australia’s current regulatory framework. Without reform, Australia risks falling behind other nations in the global tokenisation market. Key recommendations include establishing a clear taxonomy for digital assets, reforming the licensing regime, and the introduction of regulatory sandboxes.
By adopting these reforms, the nation can position itself as a leader in the digital transformation of financial markets and allow a new generation to access markets currently dominated by institutions and high new worth investors.
Written by J Huang and S Pettigrove
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