Blockchain and tokenization of assets. This phrase synthesizes the great problem that has to be solved nowadays in the transmission of real estate on the Internet of assets through an application in a blockchain. In
Blockchain and tokenization of assets. This phrase synthesizes the great problem that has to be solved nowadays in the transmission of real estate on the Internet of assets through an application in a blockchain. In a decentralised context, intelligent contracts only work if there is a definitive link between the digital version (token) and the physical version (the building). In other words, whenever the digital version of the property changes ownership, the physical version must also change ownership.
It is necessary and essential that the digital world is aware of the physical world. From a technological point of view tokenizing a real estate asset is simple, however, that it is legally accepted and with full guarantees is very complex.
Tokenization of assets example
Let’s see an example: Julia, a woman from Malaga has a house in Torremolinos and can prove that she owns that house. Peter, Spanish, can pay for the house and buy it, all through an intelligent contract on a web blockchain, easy, fast and without intervention of anyone else. Sounds good, doesn’t it?
Well, in addition to carrying out the digital transaction, you have to do the physics with what is no longer so decentralized. Here is the problem that is difficult to solve whether it is real estate, cars or potatoes in this decentralized space.
Physical assets are regulated by the jurisdiction in which they are located and this means that, in a sense, there is confidence in something in addition to the intelligent contract that has been created. That is to say that possession of an intelligent contract does not in any way mean possession in the real world and suffer from the same problem of trust as normal contracts. An intelligent contract that relies on a third party eliminates the main feature of the blockchain, the lack of trust.
Transfer tokenization of assets
In this sense when Julia transfers the house to Peter the intelligent contract must know that she actually transferred the house to Peter – to receive payment – and for that there must be a trusted third party to verify real-world documents. Thus things, the house could be represented as a non-expendable token in Ethereum, an ERC 721. Ann could transfer the house to Peter in an exchange for a certain amount of ETH. Okay, but Peter needs to trust that the token actually represents Anne’s house.
In blockchain this trusted third is called Oracles. And they’re the only way smart contracts interact with data outside of Blockchain’s environment. In other words, there must necessarily be some Oracle that guarantees the transfer of the token that represents Julia’s house to Peter and that verifies that the house becomes his legally. So things even with this oracle -which could perfectly be represented in a property title certified by the Balinese Real Estate Registry- that would happen if, for example, the token is stolen, is the house now from the digital chorizo? or that he loses it, doesn’t the house already exist to sell? or if Peter wants to mortgage, how do you mortgage a token?
To these questions can be added these others:
How is KYC (Know Your Customer) and AML (Anti Money Laundering) performed for cross-border real estate transactions?
Who advises him if there are tax benefits for the purchase in Bali and if so, how does he know the contract to reflect it?
Or as I said in the first article, if there is any dispute or discrepancy between the parties, what jurisdiction is able today to settle lawsuits of this nature?
And finally: Is there a solution that can work without problems in all jurisdictions and in all countries?
The answer to this last question is no. Nevertheless, there are several initiatives working on this legal and compliance landscape to solve this complex labyrinth, not only in the real estate world in particular, but in the cryptworld in general. And whoever succeeds will become the largest real use case in this new paradigm of the Internet of value. In the case of real estate, it will bring with it the greatest challenge so far, let us remember, injection of liquidity into the market with tokenization.
Security of tokenization of assets
So, two proofs of concept that are working in this field are factory and harbor.
The concept of factory a priori seems simple. It introduces an intermediate layer between the real estate company that offers to invest in the real estate and the buyers and sellers, in such a way that this layer is a third of confidence represented in the figure of a trust that acts as guarantor. In other words, the property is transferred to the trust and is collected in a contract that operates digitally within the blockchain, which is reviewed for each transaction by the trustee. And they are connected through APIS, which are protocols for websites to communicate with each other – to understand each other – and in this way the
which are protocols for the websites to communicate with each other – to understand each other – and in this way the intelligent contract that is finally used to sign the transactions is revised to give it validity.
Blockchain and tokenization of assets. Impact on the real state market
And Harbor is designing a similar concept but it complicates it a bit more. Enter another intermediate layer as a token. This token called R-Token (Regulated Token) carries information for regulatory compliance and in all jurisdictions – they say – from issuance to exchange in secondary markets. To do so, it relies on what they call the Service Regulator, a protocol that checks the information that the R-Token has to carry, including a white list of investors who can participate-in the purchase of property tokens-because have been approved and verified in KYC and AML, ect and supervised the regulation of the country of emission. For this in turn relies on what they call the service record, which provides the address of the appropriate Service regulator for the R-Token; The R-Token then verifies with the given Regulatory Service to obtain commercial approval. A little mess, however in the attached figure clarifies more this play on words.
Blockchain and tokenization of real state
Tokenization brings great advantages, but like any innovation, it must have the participation of established companies and organizations as well as regulation. It is difficult to transition from an old economic model to a new one without counting on them. The total elimination of intermediaries such as the blockchain technology behind Bitcoin -with capital letters- is intended, it can not be applied in all the areas in which it is tried to implement it.
The key challenge for any system that involves the tokenization of tangible assets, such as real estate, is to ensure that the digital token remains linked-for life-to real-world assets.