Asset-Backed News Vol.13

We’re packing it thick with tons of good information in the latest version of Asset-Backed News.

Today, we touch on:

• The Digital World of Real Estate Tokenization
• How to Avoid Risks of Real Estate Tokenization
• The European Union Crypto Framework Adoption

The Digital World of Real Estate Tokenization

The real estate industry is more digital than ever—and investors are taking notice in the form of tokenized investments.

The ability to purchase a fractionalized portion of a commercial real estate asset, tokenization is creating efficiencies and liquidity in the market, enhancing transparency and security, and drawing interest from all corners of the globe.

Tokenization in real estate instantly erases the frustrations and barriers to entry typical of traditional commercial real estate: the high cost of investment, lack of liquidity, inefficiency in processes, difficulty investing across borders, and too many intermediaries.

For these reasons, tokenized commercial real estate is one of the top investment trends for 2022. According to a recent report, if just half a percent of the global real estate market were to be tokenized in the next five years, it would represent a whopping market size of $1.4 trillion.

The stages of tokenization

Fortunately for investors and developers, commercial real estate tokenization is as easy as 1, 2, 3:

Stage 1: Deal structuring: In this initial stage, commercial property owners determine which assets they wish to digitize and then structure the investment deal for shareholders.

Stage 2: Platform selection: At this point, owners determine which token platform to use for their project; all platforms engage blockchain technology to support safe and standard agreements between sellers and buyers.

Stage 3: Issuance and regulation: At this point, tokens are created and issued through a security token offering or STO, similar to an initial public offering or IPO for stocks. Various regulations must also be followed. Once the tokens are issued, and regulations are met, investors can begin trading tokens and investing in properties anywhere across the globe.

Challenges and benefits

There are both plusses and minuses to real estate tokenization, as with any investment type. Fortunately, the benefits far outweigh the potential issues, including uncertain and varied global regulations, potential volatility in the market, lack of broad-based awareness, and the possibility of poor property management. It is also wise to consult a lawyer and accountant before investing and for those who need support in navigating the industry.

On the flip side, commercial real estate tokenization offers efficiencies, transparency, liquidity, diversification, and security—not to mention accessibility to newer investors from all around the world. Likewise, developers benefit from fresh capital for current and future projects.

Tokenization is already revolutionizing and transforming an industry ripe for change. It’s welcoming in new and more investors and changing the shape of the commercial real estate industry for the better.

How to Avoid the Risks of Real Estate Tokenization

One of the reasons tokenization in commercial real estate is so widespread—reaching a market cap close to $30 million as of last November—is its reputation for being a low-risk, high-reward investment opportunity.

However, every investment comes with some inherent risk, including tokenized real estate, and “buyer beware” is a valuable warning across industries. In particular, the most common hazards in this field today include low-quality real estate, a poor business model or management, market fluctuations and lower liquidity when markets are less active.

The good news is that every one of these potential risks is understandable and surmountable.

Risk avoidance 101

Fortunately, the industry will manage some of the risks for you, particularly if you focus on overarching regulations and compliance. Check out every company and/or individual before you consider doing business with them to ensure that they don’t have any outstanding licensing or reporting issues. The commercial real estate industry has plenty of regulations and staying in compliance with them is a straightforward way to reduce the risk for investors.

This goes hand in hand with due diligence. Again, any individual or company you invest in should be open and honest about their experience, business model, management team and anything else you have questions about. Do your due diligence and avoid feeling rushed into making a binding decision—that way, you won’t have any unwelcome surprises down the road.

Then, ensure that potential investments have a solid value proposition that incorporates an excellent business model, properties in top-notch shape, a strong marketing team and anything else you are interested in when it comes to a tokenized commercial real estate investment.

Tokenized real estate for the win

Fortunately, tokenized real estate is one of the more low-risk investments available today—but that doesn’t mean you shouldn’t do your homework to reduce the risk even further.

As with any investment opportunity, there are risks for both owners and investors in the commercial real estate world. Seek out the companies with substantial compliance, business plans and value propositions to ensure your token is being invested in the right property and the right fit for your financial goals.

European Union Adopts Crypto Framework

Following on the heels of U.S. President Joseph Biden’s executive order to establish a national policy regulating cryptocurrencies, the European Union again took up the mantle of creating a uniform legal framework for such assets.

The EU’s Economic and Monetary Affairs Committee recently voted for an updated draft of the Markets in Crypto Assets (MiCA) framework, key legislation to regulate and oversee digital assets in the EU’s 27 nations. The latest draft promotes a “passportable” license that would simplify the process for crypto firms interested in doing business throughout the EU bloc.

A broad passport for crypto

As of today, the EU lacks far-reaching governance and regulations, even as cryptocurrency continues to grow in usage. The MiCA is designed to establish broad standards and rules for all member states, simplifying the work for both companies and consumers.

In essence, the new legislation, which is presently being negotiated by different governing bodies, will further the development of digital services and crypto payment options; however, it will not apply to a digital currency used by central banks or security tokens. At present, the Markets in Crypto Assets framework is expected to be governed by the European Securities and Markets Authority when it comes to issuing tokens—the European Banking Authority will manage the supervision of digital tokens. On the whole, the legislation is focused on transparency, disclosure, integrity and stability.

“By adopting the MiCA report, the European Parliament has paved the way for an innovation-friendly crypto-regulation that can set standards worldwide,” according to Parliament member Stefan Berger.

A green focus

While a previous version of MiCA aimed to limit crypto that relied on proof-of-work, an incredibly energy-intensive process, a new provision removes that language while focusing on sustainability. The European Commission must find a “legislative proposal to include in the EU taxonomy for sustainable activities any crypto-asset mining activities that contribute substantially to climate change” by Jan. 1, 2025.

The European Commission, which is charged with proposing new legislation, has also been asked to address energy consumption in the gaming industry and data centers as additional climate threats.

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