Part 8 - Perspectives on Banking - more examples of Blockchain Property Tokenization in the future and introduction to Blocksquare.

Sharing a few more possible examples of how in the future tokenization could positively solve for other specific use cases, building off the FTB “Jack and Diane” example of the last article. The examples below are executable today via transferring property into an SPV and issuing Security tokens to investors in a regulatory compliant manner. Regulation is of course evolving and catching up, and examples include MiCA (Markets in Crypto-Assets Regulation) in EU and the Property/Digital Assets Bill in the UK, bringing more helpful clarity to this area in general and enabling more activity/scaling and development. ?In the future, land registries will be digital and property tokens will be directly able to be registered with the land registry. ?Of course, typically ownership of a Real World Asset (RWA), e.g. a property, an equity, a security, a car, is subject to some type of regulatory registration, posing challenges for RWA tokenization, fractionalized ownership and transferability. ?For instance, land registries typically limit the number of parties permitted to own a piece of land, and any ownership changes must be registered. ?However, a notable development in this space is the Israel Land Authority initiative to introduce a digital land registry and a trading exchange for tokenized real estate. ?At the end of this article, I will discuss Blockquare’s unique approach to property tokenization where economic rights are tokenized as opposed to the property title. ?But, for the examples below the focus is on economic title, and they are therefore I believe “killer use cases” of the future.

Equity Release London

Colm and Georgia are 65 and 63 years old respectively, both are retired, Colm has recently finished with a Global Civil Engineering company where he was and M.D., and Georgia is just retiring from a Physiotherapy practice, in which she was a partner and practicing physiotherapist. ?They live in Notting Hill in London, in their home which they bought 30 years ago, which is now worth ￡2.5 million. ?Both have defined benefit pensions and have a very comfortable future ahead of them. ?However, their children, Kate and Sarah, both in their 20’s, are both looking to buy their first homes and Colm and Georgia want to help them both with deposits. ?Colm and Georgia decide to finance the deposits for their 2 daughters by tokenizing their home and selling tokens to the value of ￡500,000 to investors.

They contact the tokenization marketplace; it provides an end to end customer service/journey. ?100,000 tokens are created, the tokens are a legal representation of the property and describe all aspects of the asset with smart contracts behind the tokens detailing and representing all actions required for the proper functioning of the tokens. ?20,000 tokens are successfully sold at par to an Institutional investor, looking to build up a large portfolio of discreet upper end London property in specific post codes through tokens. ?The tokens represent 20% ownership/equity in the house. ?This is a different investment than for example a REIT or ETF investment, the specificity of the investment, and the liquidity being superior. ?REIT’s and EFT’s are generally not development projects or single assets, a REIT has to pay out 90% of its income in dividend and in a downturn negative NAV and IRR movements on the back of interest rate changes, can force a REIT to liquidate and/or become insolvent. ?The property tokens I am referring to here are suitable for investors who want to invest in a specific property in a specific location for a flexible period of time. ?The Institutional investor is modelling a 20-year investment in these tokens but can sell the tokens in the secondary market which is showing good liquidity.? If held to the expected 20-year period (house sold and/or tokens bought out through inheritance management etc) the tokens will represent 20% of the value of the house at this point. ?The Investor is forecasting this house in this specific part of London, with its specific post code address/location, will appreciate by circa 2% per annum over the next 20 years. They expect a compound circa 50% increase on their tokens if they hold for 20 years.

Colm and Georgia are happy to continue to own 80% of their home through their tokens, they recognise that their home has increased in value enormously since they bought the house, and they still have a significant asset, with which they can hold, trade (sell more tokens, buy back etc), in the future. ?By tokenizing the property they have created liquidity, they have been able to extract value, help their daughters with a ￡250k home buying deposit to both, they still are the (by far) majority owners of the property and they have increased their options in terms of what strategies to deploy in terms of managing their asset in the future.

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Shared Ownership Edinburgh

Kate in Edinburgh is just qualified with a Master’s Degree in Sustainable Energy, and she has just started working in the sector. ?She pays rent of circa ￡1,300 a month, currently she can’t afford to buy an apartment in the area she would like in Edinburgh…￡660,000, so, she pays rent each month. ?Kate, and her two friends could buy an apartment that has been tokenized, each providing ￡20,000 deposit upfront, and buying tokens worth ￡200,000, Kate providing her ￡200k of tokens to the bank as collateral and taking a mortgage out for the amount. ?The bank accepts the tokens as secured primary collateral as the tokens are simply the digital version of the title deeds, all connected to the digital land registry. ?The smart contracts embedded in the tokens describe the legal and administrative environment pertaining to the rights and obligations of the token holder, legal ownership, right to live in property etc. ?If Kate can no longer afford her mortgage repayments she may have to sell some tokens in the secondary market, if she loses her job and can’t afford the mortgage at all, the Bank can as a last resort can repossess the tokens which are liquid, sell them in the secondary market to an investor, without any infringements on the rights of the other token holders. ?Today, Banks go through a whole suite of forbearance journeys with customers with challenged affordability, interest only, part interest and capital, part interest, moratoriums, voluntary sale, etc. ?A scenario where the affordability of the borrower could be tweaked through token sales or purchases in a sliding ruler type manner, seems very attractive to me, (when compared with the clunky journey customers go through today).

“Ah, hold on!”, I hear you say… “it’s not that easy! ?You are ignoring some of the devil in the detail!”. ?“Yes”, I am not detailing in these examples above some of the critical aspects of the journeys and propositions, some which on first glance seem problematic, but which, I believe are eminently solvable through well written smart contracts in the same way that today in the property markets, there are a myriad of potential problems and scenarios that could eventuate that are dealt with through various off chain legal contracts and regulation, so I believe it’s all achievable, and in fact in a more streamlined and less bureaucratic way than how we have been dealing with property over the past few centuries!

The most basic challenge is again, as I have been alluding to on a number of occasions, that today, property tokens do not currently reflect direct title ownership, they are not connected to land registries, typically they reflect an economic right/return/yield from the property therefore suitable for investment property use cases or ownership of shares in an SPV that owns the underlying property. However, we are sketching out the future here, one in which property becomes vastly more liquid and accessible in fractions.

I am assuming through time that the token marketplace matures through either centralised or decentralised (Automated Market Maker) exchange(s), providing consistent 24/7 liquidity for the tokens.

I am assuming that Smart Contracts will ensure all legal and administrative activity connected to the property is properly accounted for, e.g., property occupation rights, and ensuring the ongoing quality and maintenance of the property.

Granted, these are all very big assumptions and risk areas to be solved for, but for now this article is using a student’s prerogative to do some sketching out of some blue sky thinking about the future and how it might/should look, “where there is a will, there is a way”!

Think about a number of property exchanges, again, whether they are centralized or decentralized is not important for now, where property tokens in houses in Madrid can be bought and sold for fiat and/or digital currencies, where a property token in a property asset in Milan can be exchanged for one in Edinburgh, where the ability to digitize, dematerialize, fractionalize, tokenize, is standard, opening up possibilities in property management, ownership, letting, investing, borrowing, hedging, buying, selling that are simply not available now. ?I think that’s a vision to foster, and to incrementally move towards, conscious that the “property market” is a “complicated beast” that moves (very) slowly. ?The potential for social good, the democratization of property, the ability for more citizens to in some way get on the property ladder and own some equity in property is a worthy north star.

So, “what can be done today” with regards this nascent area of property tokenization I hear you ask. ?Pioneering companies have been at this for 6 or 7 years, and one of them is Blocksquare, (www.blocksquare.io ). ?Blocksquare’s blockchain and API solutions allow property owners to digitize the economic rights of their properties, launch investment platforms and connect potential investors to real estate investment opportunities through their decentralized marketplace “OceanPoint”. ?Blocksquare’s tokenization solutions enable increased liquidity and investment optionality for a wide selection of players in the retail and commercial real estate investment space, like asset managers, investment funds, private investors, real estate developers, financial consultants, family offices and others.? Blocksquare’s ecosystem enables a targeted approach to investment property, unlike REIT’s or ETF’s which are more generic in nature. Take a look through the website and see what can be achieved today.

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