It’s been more than four years since the world’s first real estate token offering, which saw a stake of almost one-fifth of the St. Regis Aspen resort hotel sold to investors keen to acquire a slice of the prestige Colorado property.

The sale of the stake in the 179-room hotel raised US$18 million and was hailed at the time as a revolutionary new means of opening up arguably the world’s oldest asset class to the wealth creation potential of blockchain.

In the period since, properties around the world have been tokenized in a development that has the potential to reshape the real estate sector. Yet the phenomenon has not gained the kind of traction many of its proponents had hoped it might by now. 

As is the case in many segments of the digital asset space, part of the reason may be the complexity of the technology, much of which remains poorly understood by large swaths of the general public, even though it has gained much attention amid the wild volatility of the cryptocurrency market in the past two years.

Part of the reason may also be that real estate tokenization can mean different things to different people, depending on who you ask.

Different strokes

“When you talk about real estate tokenization, it really depends on what kind of structure we’re talking about,” Michael Wong, a partner at the Hong Kong office of multinational law firm Dechert, told Forkast. “If you’re just using blockchain technology to replace a land registry and issue a token as evidence of ownership, then it would mostly be regulated under the relevant land laws.

“But if you’re referring to tokenization by taking an asset and issuing a security backed by that asset, that’ll be similar to a collective investment scheme where investors’ money is pooled by virtue of acquiring the tokens and returns are based on the return of the asset, and therefore will most probably be subject to securities law,” Wong said, noting the compliance burden such law entails and securitized property tokenization’s parallels with real estate investment trusts (REITs), which are typically subject to numerous restrictions and requirements.

Jason Chan, a senior associate at Dechert and a colleague of Wong’s, said: “It’s not very different from REITs or real estate funds, which already exist whether or not there’s tokenization of real estate. Tokenization is an evolution of that by putting it on the blockchain.”

Laura Pamatian, the founder of US-based HeightZero Real Estate, an independent advisory firm that focuses on blockchain and artificial intelligence in real estate, told Forkast that tokenization in the industry could certainly be a form of securities trading, which she said benefited from an already well-established framework of regulation.

“Here’s why security tokens are serving retail investors: They’re Securities and Exchange Commission-compliant,” she said. “Giving retail investors access to a commercial real estate investment through an SEC qualified offering isn’t new, what’s new is adding the option of liquidity through tokenization, we can still do that compliantly with current regulation. Tokenization also allows compliance to be programmed into the tokens, adding another layer of security and trust.”

Delivering through DeFi 

However, Alvin Ngo, a director of mortgage underwriting at Edmonton-headquartered Canada ICI Capital Corporation, said that not all real estate token offerings were necessarily securities, and that those which did not fall within the ambit of securities rules could be more innovative and give investors more direct control over their holdings.

“Securities require you to place your trust in the team you’ve chosen to work with – your lawyer, your broker – and in that process, if they do something you’re not happy about, the process might not be as you would have imagined,” he said. “It’s not as revolutionary as the promise of blockchain technology.”

He contrasted decentralized finance (DeFi) token offerings with those involving regulated securities, which he said as a product of centralized finance (CeFi) meant “someone else keeping your money instead of you.”

“As we move forward from CeFi to DeFi, the model encourages self-custody for funds and assets, meaning that you’re in control of your own money [unlike] centralized tokenization, which is like a REIT.”

Ngo said that DeFi real estate tokens not governed under securities law – which were so far scarce – would nevertheless require a new and dedicated regulatory framework to reach their full market potential.

“The first foundation should ensure the ownership of a piece of real estate for any individual investor or participant in a project,” he said. “The second piece should be built around redeemability – so you can be sure the title you hold can actually be redeemed. And the third should ensure it’s executable.

“It’s got to form part of an international law system revolving around these three pillars so people can have peace of mind, understand it and buy into it, and it can actually be viewed as a new investment alternative for people to invest into – not just like a real estate traditional security or a REIT.”

The right regulation

Pamatian, by contrast, did not argue for such a thoroughgoing regulatory rethink, and said the system of securities regulation in the U.S. was already sufficient to govern the real estate tokenization market.

“There’s already a very valid framework around securities, and I really feel that tokenizing real estate; which means writing, tracking, managing the shares on blockchain, is the most practical application of blockchain technology in the space” she said “When it comes to utilizing security tokens compliantly, we already have a framework there. It’s really just a matter of education, and once people really understand what tokenization means for real estate investments, they will see how it benefits not only the real estate owner, but also the investor. It’s a win-win.

Andy Yiu, head of corporate finance at Hong Kong-headquartered investment holding company BOA Financial Group and a cofounding vice president of the non-profit PropTech Institute, was somewhat agnostic on whether DeFi or CeFi would prove to be the best model for the industry, instead emphasizing the importance of fostering the development of an ecosystem to support it.

“As a new technology coming to the market, real estate tokenization requires early adopters who are willing to take risks,” he told Forkast. “Number one, we need the ecosystem to grow together, so there need to be entrepreneurs and landlords who are willing to try despite the risk of failing to sell or failing to take off. 

“Number two, we need to have security token listing platforms that provide real solutions to landlords, such as using better, cheaper blockchains than, for example, Ethereum, and we need intermediates and real estate agents who are incentivized to help market the products.”

Yiu said securities regulations in certain jurisdictions had kept ordinary retail investors out of tokenized property offerings, holding back the development of the market.

“A change that would help real estate tokenization to grow would be allowing tokens to be sold to retail investors, meaning that restrictions that reserve them only for professional investors, should be lifted,” he said, referring to net worth and income requirements imposed in a number of jurisdictions. 

“In order for real estate tokenization to take off, governments should allow medium-sized investors to freely participate, because that’s where the market is,” he said. “If you don’t have the market, nobody will invest in your technology and no issuer will bother to approach it.”