(From a recent article in the Irish Times)
(https://www.irishtimes.com/property/commercial-property/2024/06/12/could-blockchain-technology-be-applied-to-real-estate-investment/) Blockchain technology
The world of Bitcoin and blockchain continues to evolve and grow, fascinating and sometimes intimidating. A milestone was reached in January when U.S. financial regulators approved the first Bitcoin ETF (exchange-traded fund), a long-established standardized investment vehicle that gives investors independent exposure to the asset. Through an ETF, U.S. investors can gain exposure to Bitcoin using a regulated broker, without having to buy and store Bitcoin themselves.
Tokenization of all financial assets…
With a clear regulatory framework in place, trusted fund platforms are jumping on the bandwagon. Firms such as BlackRock and Fidelity have each launched Bitcoin ETFs, creating new demand for this new digital asset. BlackRock's launch quickly became the fastest growing ETF in history, with the fund reaching $15 billion in value within 10 weeks. The market has taken notice, and Bitcoin has gone from trading at $44,000 per coin earlier this year to now trading at over $70,000.
BlackRock CEO Larry Fink declared that the launch of a Bitcoin ETF is “the first step in a technological revolution in financial markets. The second step is the tokenization of all financial assets.” Tokenization refers to the digital conversion of asset ownership onto a blockchain platform. When Bitcoin is bought and sold between parties, the exchange takes place on a proprietary settlement platform called the Bitcoin “blockchain.” Applying this settlement approach, or blockchain approach, to other assets is the second step that Fink mentioned above.
Currently, a countless number of custodians are needed to successfully trade financial assets. Conversely, $30 billion worth of Bitcoin is exchanged between buyers and sellers every day without the need for human intervention. The software that runs the blockchain infrastructure ensures that transactions are successful automatically, without manual administration. What's more, this can be achieved without downtime; the software runs 24/7. What if all financial assets could be settled this way?
Blockchain for Real Estate
What about real estate? Unlike Bitcoin, bricks and mortar cannot be digitized, but if ownership or “title” can be digitized, then the benefits of blockchain technology may be applicable to real estate.
One of the benefits of tokenized ownership is “fragmentation.” Ownership can be split into small shares and stored on the blockchain. Selling real estate to a larger pool of token buyers reduces the execution risk associated with relying on a single counterparty. At the same time, it allows people to invest in real estate with small amounts. Individuals can save regularly in real estate tokens, reducing the burden they would otherwise incur when buying a house, for example. This helps make the dream of homeownership a reality, as the value of these savings rises in sync with the value of real estate. Similar to Bitcoin, buying and selling these real estate tokens can be done 24/7 using a smartphone.
Blockchain technology could also be useful for larger commercial real estate transactions. Selling part of a commercial real estate investment could allow owners to raise capital without having to sell the entire asset. Similarly, unsecured assets could gain leverage by selling tokenized debt as a new source of liquidity.
Yeah… but no
But there are barriers to tokenizing real estate. Management of real estate titles is not suited to multi-party ownership. How will decisions about upgrading be made among so many token holders? Can assets that are already leveraged with multiple claims be tokenized? Who will creditors hold responsible for repayment? These are not insurmountable challenges, but they are also not problems that blockchain technology can necessarily solve.
The first step in real estate is likely to be the tokenization of funds rather than individual assets. BlackRock has already established an ETF backed by real estate assets that can be easily tokenized. Similarly, areas where financial assets such as real estate bonds and securitizations are easily amenable to the digitization process could accelerate blockchain adoption in the credit sector.
Tax-efficient incentives
With over €150 billion sitting idle, mostly in dormant bank accounts, the Irish government is considering a new tax-saving investment scheme, and blockchain technology could play a role in unlocking this money by allowing individuals to make smaller, more accessible property investments earlier in life.
Indeed, Ireland has a thriving ecosystem of start-ups looking to unlock the power of blockchain technology, and solutions to the challenges of real estate as a tokenized asset class could potentially be realized locally.
This new technology still has a way to go before it realizes its potential, or, as crypto evangelists often refrain when assessing where we are in Bitcoin's journey as an investment, “it's still early days.”