Non-interchangeable tokens (NFT) are on everyone’s lips. Although most projects currently focus on art or static images, the potential of the technology goes far beyond these limits.
Although the term “tokenization” is widely discussed, it remains vague and takes on different meanings depending on the context. In the context of real estate, tokenization refers either to the representation of units or shares in an immovable asset, or to the use of a unique, non-interchangeable Blockchain-based token to represent (one) real estate object. If the first use case is focused on liquidity and partial investments, the second is designed to facilitate the transfer of ownership of real estate.
Digitization of corporate assets
This approach to the tokenization of real estate can be more generally called the digitization of tangible assets. The main idea underlying digitization using NFT is the transfer of full legal ownership of a unique digital file, which, for example, can become a real estate object represented by a digital token and subject to the rules of a blockchain-based smart contract transaction as part of the transfer process.
This can significantly reduce the numerous frictions associated with transactions between the parties. Today there are many intermediaries, from brokers to lawyers and notaries and land cadastres. These parties are usually engaged in obtaining and systematizing all relevant information about the property. Fragmentary access to this information delays and complicates today’s transactions. Digitized information infrastructure, possible in combination with NFT as a digital reference point.
Examples of tokenized real estate assets
In the context of NFT and real estate, special attention is paid to the digital representation of property rights, which themselves become the subject of a transaction. What exactly does tokenization of a real estate asset mean?
An example is the Next Earth platform. It is an NFT-based digital land acquisition platform where users can instantly buy and sell land. The basic concept is to create a metaverse in which land plots will be sold as NFT. These digital plots will make it possible to increase land prices.
In short, they want to create a DeFi ecosystem that will serve as a starting point for exploring cryptocurrency, with an emphasis on public work to protect the environment.
Again, it is necessary to distinguish tokenization as a form of alternative financing, and tokenization as the creation of a non-interchangeable digital counterpart of a real asset. Of course, a combination of these two options is technically possible.
If the Next Earth project is a good example of the first, then the NTFA project and the British startup Mattereum are examples of the second.
The goal of Mattereum is to ensure trust in physical assets with the help of NFT. At the same time, Mattereum seeks to bridge the gap between the virtual and physical economy. To do this, they create unique digital tokens that certify the right to physical ownership of the object. Their approach differs from purely digital NFTs in that all tokens are provided with guarantees, insurance and legal force, which allows you to create trust in the trade of physical objects (including real estate).
Legal issues related to the tokenization of real estate
When considering tokenization as an investment tool, an assessment of each specific case is necessary.
Is this a form of joint ownership? Is this a binding contract? Various legal issues arise, such as disputes between the beneficial owner and the legal owner (some consider tokenization as a form of trust), and another way to dematerialize property rights.
In the world of cryptocurrencies, it is often argued that the lack of a legislative framework is an advantage for novice providers. On the contrary, lawyers are increasingly turning their attention to the sale of tokens and cryptocurrencies, making it clear that ITO, ICO and other derivatives do not operate in a legal vacuum.
Today it is unclear what the regulation will look like. Several issues remain to be resolved, including how tokenization will interact with other, more established principles of securities and real estate legislation. There are many financial regulations, tax rules and corporate laws that need to be taken into account. Various financial regulatory authorities have spoken out about ICO and token sales. Especially from the point of view of consumer protection, it is necessary to develop a framework limiting legal uncertainty.
On the other hand, we can see many uses for NFT in the context of real estate. The absence of official ownership rights restricts the use of real estate as collateral for access to credit markets. A reliable system of ownership rights allows you to place bulky assets in a more accessible format. A representation is much easier to share, mobilize or use as collateral for transactions than a real physical asset.
De Soto calls this “asset fungibilization” in his famous book The Secret of Capital. According to De Soto, the key mechanism is to separate the rigid, bulky physical condition of an asset from its economic characteristics and value. This is usually done by creating an asset view. By creating an interchangeable representation, an asset can easily become the subject of a transaction.
In this regard, tokenization, or rather NFT, is nothing new. They are only a digital form of a mechanism that has existed for many centuries, namely, the creation of reliable proof of ownership of the relevant asset, which can be used to improve the efficiency and simplicity of secondary markets.
The investment form of tokenization described above is another digital and decentralized development of secondary markets. The underlying mechanism remains the same: regardless of whether the asset becomes interchangeable through a notarial deed, an extract from the land registry or a non-interchangeable token. Tokenization is basically the digitization of an existing process.In this latter sense, the terminology of NFT is perhaps somewhat contradictory. Although this concept is used in contrast to interchangeable tokens or coins, the main mechanism to be achieved in the context of real estate is precisely to make the underlying asset interchangeable. Thus, NFT makes the real estate object interchangeable and digital.
Use cases such as the Mattereum project will be groundbreaking in the data strategy they are developing to create an interface between the digital and physical worlds. This data interface will become the platform we need to achieve our goals, for example, in relation to the circular economy and climate change.