Tokenization of real world assets such as real estate

The ‘tokenizing people’ tell us that the possibilities of tokenization are endless ‘as they allow for both proof-of-ownership or fractional ownership’. Estimations by McKinsey show that the volume of tokenized digital securities will reach $5 trillion by 2030. Well, it’s also possible for me to walk to Mongolia. However, I would need a big ‘Why’! I’ve seen possible tokenization lists that include everything from debt to energy to supply chain to, believe it or not, identity - I always ask the same question. Why would someone want to? How big is the value add?

So, we can discount the majority of the use cases, in my opinion. Most of them are nonsensical. Then, is it even possible to find real use cases, where tokenization of real world assets makes sense? Here are a few that I think definitely make sense.

Real Estate

This is the big one for me, primarily because of three things. First, buying and selling real estate is an absolute pain. The thought of it makes some people shiver. So it’s broken. Anything that makes it easier, decentralizes it and reduces cost will be welcomed with open hands.

The second reason is inflation. Fully owning a property is getting to be beyond many people. Check Dublin, for instance. So fractional ownership is already happening. And it’s an even bigger pain. Again, this will make it easier, less onerous and you’d have to think less expensive, once it is adopted more readily. Think of a group of friends pitching in.

Thirdly, it genuinely opens up the real estate market to smaller investors - people who otherwise wouldn’t have access. A type of crowdfunding that is already becoming very popular on equity crowdfunding platforms. Let’s dive in a little. Another stat: the global real estate crowdfunding market is projected to reach a staggering USD 86.9 billion by 2027, growing at a CAGR of 58.1%.

I’m not sure about these kinds of stats, but I do believe this is primed for tokenization. In this instance the real estate assets are converted into digital tokens. Each token represents a share or ownership stake in the underlying property. These tokens are then recorded and managed on a blockchain, providing transparency, security, and ease of transfer with smart contracts handling the whole process. Sites such as https://realt.co/ and others are testing the water here.

In an $18 million deal, nearly one-fifth of St. Regis Aspen sells through digital tokens back in 2018. The ownership group behind the St. Regis Aspen announced Tuesday the selling off of 18.9 percent of the resort hotel through $18 million in digital tokens.

Buyers of the tokens, sold at $1 each through a real estate offering called Aspen Digital, had to be accredited investors willing to purchase at least 10,000 tokens.

New York-based asset manager Elevated Returns, which owns the St. Regis, will hold onto the remaining 81.1 percent of the 179-room luxury hotel. A spokesman for Elevated would not identify the new minority owners.

Environmental Infrastructure projects & carbon credits

One subscriber, John, commented on our last poll:

“RWA's related to environmental infrastructure projects could be a good fit. Industry might be more open to it and younger investor profile. Tangible assets like wind farms, carbon capture etc. as well as intangible assets like carbon credits. Maybe option for crowdfunding platforms too, e.g. more established revenue generating businesses on Seedrs.” 

Bingo. In thinking about this it makes more and more sense. Lots of capital intensive and genuine ‘green’ projects would fit in this bracket I think. There tends to be a lot of goodwill towards them, but payback can be very long-term. Tokenization would certainly help that. It could also be used to attach a say or input from the owners. In other words, have a say in the direction of the project, as this is often the motivation for investors.

Art and art collectable assets

This is more niche but has also seen some high profile traction through NFT’s. The most expensive NFT sold so far is The Merge, the NFT collection created by digital artist PAK that was sold for $91,806,516 within just 48 hours following its release on December 3, 2021, on the NFT marketplace Nifty Gateway. Again, from an investment point of view, this opens up an asset class to people that were usually excluded. That’s the main ‘why’. I think the fact that there is also a digital ledger is a big plus for collectibles, from a traceability of ownership POV. I don’t however see this being a huge trend. It will be used where micro-investments are welcomed.

Ownership of a business

A little bit out of left field but this is one that I think has legs, maybe even on secondary digital markets. Tokenization of shares could increase liquidity and hence aid business growth. It’s innovative, future-oriented, and secure. Since it’s also cost-effective and flexible, the tokenization of your company enables you to easily share profits with employees, suppliers, and other stakeholders you wish to include in your organization. These would of course amount to a type of security token, and would need to abide by security laws, but it could be very helpful in a community ownership situation. The next phase of equity crowdfunding?

The future

Are people investigating Tokenization? Well, yes, and no. If we take a look at the trend for ‘Tokenization, we’ll see the obvious growth:

However the notion of tokenization of assets certainly isn’t taking a major hold:

So, we’re still in really niche territory. Which is good, I think. The main issue with some of the ideas are they are nice to haves and not must haves. I say it again - Why? That’s the missing piece when data scientists and programmers have the main say. Tokenization of RWA’s means it first needs real world thinking and problem solving. Not the other way around, i.e. trying to force a solution into something that doesn’t need one. That won’t disrupt. In my opinion, we need to change out approach to crowd tokenization.

Oh, and happy 4th of July to everyone in the US. Enjoy the day.

Hopefully you continue to get some value from the newsletter. Thanks for reading and please pass it on to anyone you think will benefit. Feel free to email with any suggestions or feedback. [email protected]

Until next week, and chapter 10, Go n-éirí leat!

Derek.