A Glimpse at Real-World Assets (RWAs)
There is a new crypto trend that has caught the attention of major players such as Binance, Coinbase, Messari, Polkastarter, and Chainlink. Real-world assets (RWA) is a blockchain-based representation of physical assets, such as commodities, real estate, insurance, securities, and bonds. Tokenizations of these assets ensures that they can be easily traded, transferred, used as collateral for loans, and verified. Some of the benefits of placing RWAs on-chain include additional liquidity, reduced costs, and transparency.
Recently, Florida’s Cogent Bank proposed a $100 million participation in loans to MakerDAO’s RWA Master Participation Trust (source). RWAs represent only 13.4% of MakerDAO’s assets, but are now responsible for +55.9% of its total revenue (source).
Aave also added RWAs in partnership with Centrifuge, a crypto company that lets businesses tokenize aspects of their operations such as trade receivables and invoices (source).
In this report we would like to focus on real estate as the most prevalent class of asset among those that get tokenized. Real estate tokenization creates digital tokens representing ownership or investment in a real estate asset using blockchain technology. These tokens can be traded on a decentralized marketplace, allowing fractional investments in real estate. This makes the market more accessible and benefits asset owners by simplifying management, reducing transaction cost, and increasing liquidity and transparency in the market.
Real estate tokenization has been gaining momentum in recent years as a way to make real estate investing more accessible and efficient. According to the recent “Relevance of on-chain asset tokenization in ‘crypto winter’” report by Boston Consulting Group (BCG) and ADDX, the tokenization of illiquid assets is expected to reach $16.1 trillion (10.0% of global GDP) by 2030 with home equity making up 19.9% of the total value. In this report, we will explore the current state of the real estate tokenization market, including an overview of existing solutions, legal aspects of their functioning, and fundraising.
Overview of Existing Solutions
Single-asset platforms are highlighted with green as opposed to multi-asset platforms.
Single Asset Class Platforms
RealT is a real estate tokenization platform founded in 2019 and based in the USA. The company offers fractional ownership in residential properties, allowing investors to own a percentage of a property and earn rental income from it.
RealT is a new platform that uses blockchain to let users buy a share in U.S. real estate. Each property is split into tokens and these tokens are sold starting at just $60. Owners can collect rental income and vote on property decisions.
RealT’s mission is to make real estate investing more accessible to a wider range of people and to provide a more efficient way of buying and selling real estate assets.
Kodo Assets is a tokenization platform based in Brazil. The project was launched in 2020 and focuses on the tokenization of commercial real estate assets, particularly in the retail sector. Kodo Assets allows investors to buy shares in a property, with ownership represented by tokens issued on the blockchain.
This investment is backed by a property that not only generates returns but also produces earnings in stablecoin referred to as KODO1. KODO1 is the token responsible for ensuring that the issuance of security tokens aligns with the total supply of the offer.
The tokens will be created and distributed in compliance with the securities regulations in the Bahamas, which classifies them as security tokens. As securities, the process is subject to intense regulatory requirements. Tokens are issued using Polygon smart contracts and will grant equal property rights to holders in proportion to the number of tokens purchased. Polygon is chosen due to its large community of developers, companies, and organizations dedicated to strengthening and maturing blockchain technology.
Liquefy was founded in 2018. The project enables businesses to create, issue, and manage tokenized assets. The platform offers a range of tools for managing the entire tokenization process, from creating customized tokens to managing investor relations and secondary trading.
Liquefy offers digitization for various assets, such as private companies, public shares, funds, and real estate through blockchain technology. Security tokens will help issuers raise capital faster, easier, and cheaper while providing liquidity for investors.
Liquefy has raised over $3 million in funding to date, according to Crunchbase.
Blocksquare is a Slovenia-based project that enables fractional ownership and offers a suite of tools and services for real estate developers and investors, including asset management, fundraising, and compliance solutions. The platform is designed to streamline the real estate investment process and provide greater transparency, security, and efficiency.
The platform includes 5 products:
- Spring — tokenization protocol, which generates 100,000 tokens per property, divides into 1%, evaluates the property on-chain, legally binds tokens.
- Delta — allows a user to launch his or her own marketplace where investors can log on, browse through opportunities and execute investments.
- Tide — P2P secondary market with investor reports and revenue distribution.
- Wave — smart contract tender to buy back tokens.
- Oceanpoint (liquidity protocol) — a set of smart contracts that form a DAO and aggregate assets under tokenization with a USD-correlating stablecoin, offering DeFi products.
METAIN is a co-investment platform based on blockchain. The company was founded in 2021 and is based in Canada.
METAIN offers asset-backed NFTs for real-world properties with stable APYs of 15–25%. These NFTs rely on the Vietnam real estate market evaluation, which increases year-over-year, making them an investment that is not affected by market volatility.
REIT NFTs are digital versions of fund investment certificates that start at only $10/NFT. They offer stable growth and low risk because of their CBD assets. They provide a higher yield than other investment solutions, making them a monthly saving option.
Invest in valuable CBD assets with limited budget and high yields. METAIN also offers greater liquidity than traditional real estate investment.
The company has raised $1.8M to date.
Platforms for Tokenization Across Various Asset Classes
DigiShares is a tokenization platform founded in 2018 and based in the US that enables businesses to issue and manage security tokens. The platform allows issuers to create customized tokens that represent shares, equity, debt, or other assets, and offers a range of tools for managing the issuance, distribution, and trading of those tokens.
They cater to asset and investment fund managers, real estate and renewables developers, and others looking for more efficient ways to manage and raise funds. The platform handles investor registration, verification, token purchasing, and the long-term management of tokenized investors. DigiShares also offers an internal OTC exchange where investors can trade their shares within a project.
The total funding amount to date is $2M, according to Crunchbase.
Polymath was founded in 2017 and is based in Barbados. They offer a security token platform that enables businesses to issue and manage security tokens. The platform provides a range of tools for creating customized tokens, managing compliance, and providing liquidity to investors.
Using the Security Token Standard, ERC-1400 embeds regulatory requirements in the tokens, ensuring only verified participants can trade them. The aim is to bring the multi-trillion dollar financial securities market to the blockchain while simplifying the technical challenges of creating a security token.
Polymath has raised over $58.7 million in funding to date.
tZERO is a blockchain-based financial technology (fintech) company that aims to revolutionize the way securities are traded. The company was founded in 2014 and is headquartered in New York.
tZERO’s platform utilizes blockchain technology to provide a secure and transparent way to trade securities, including stocks, bonds, and other financial assets. The platform is designed to eliminate intermediaries and reduce costs, while also providing greater access and liquidity to investors.
In addition to its trading platform, tZERO also offers a suite of services that includes digital asset custody, advisory services, and data analytics. The company has partnered with leading financial institutions and regulatory bodies to ensure compliance and expand its reach.
In 2019, tZERO launched a traditional cryptocurrency exchange called “tZERO Crypto”. However, in an announcement on February 3, the company confirmed that it would wind down the exchange on March 6:
While the regulatory environment around crypto assets is clarified by the SEC and other regulators (including in view of recent events), we will continue to focus on our unique regulated securities business, which we believe will be the venue where most digital asset securities will trade.
tZERO is a subsidiary of Medici Ventures, which is owned by Overstock.com. The company has raised over $159 million in funding.
ADDX is a blockchain-based platform founded in 2017 in Singapore, backed by SGX, Heliconia (a venture arm of Temasek, a Singaporean state holding company owned by the Government of Singapore with a total of $496.59 billion in assets) and several financial institutions from Japan and Thailand, including SGX, Heliconia Capital, Development Bank of Japan, Japan Investment Corporation, Tokai Tokyo, Kiatnakin Phatra and Hanwha Asset Management (source). ADDX specializes in the tokenization of assets. It allows investors to buy and sell fractional ownership of a wide range of traditional assets, such as real estate, art, and private equity using blockchain technology.
ADDX utilizes blockchain technology and smart contracts to tokenize and fractionalize private markets, such as pre-IPO equity, private equity, hedge funds, and bonds. Tokenization can reduce the minimum investment size for these private investments.
According to ADDX, the platform effectively reduces the minimum investment threshold for private markets from $1 million to $10,000 (source).
ADDX raised a total amount of $140.9 million, according to Crunchbase.
Tokeny Solutions is a Luxembourg-based fintech company that offers a platform for issuing and managing security tokens or digital assets. The company provides a range of services to issuers, including token issuance, transfer and registry services, and compliance with legal and regulatory requirements.
Tokeny Solutions helps companies dematerialize assets on the blockchain to reach global audiences, enforce compliance, automate processes and increase efficiency. The Luxembourg-based FinTech company is a market-leader in providing an institutional-grade, modular platform for issuing, transferring, and managing tradable digital assets/security tokens. These include tokenized loans, structured notes, equity, and funds. Tokeny Solutions has issued multiple tokenized offerings across five continents, with more on the way.
One of the key benefits of Tokeny Solutions is its focus on compliance with securities regulations. The platform is designed to help issuers comply with relevant laws and regulations in different jurisdictions, such as KYC/AML requirements, investor accreditation, and transfer restrictions.
The company raised €10 million to date.
Securrency is a US-based fintech company founded in 2015, that offers a platform for the issuance and management of digital securities or security tokens.
Securrency simplifies financial technology by allowing tokenized issuance and trading of securities on different distributed ledgers. The protocol integrates recent advances in distributed ledger technologies, payment gateways, and security frameworks to make financial services more secure, transparent, efficient, and accessible. With security and compliance at its core, Securrency supports an efficient market that brings together investors with value creators, such as asset owners, startups or fund managers requiring capital.
The platform is designed to comply with relevant securities regulations and offers features such as KYC/AML, investor accreditation, and transfer restrictions. Securrency uses blockchain technology to create tamper-proof and transparent digital tokens that represent ownership in a range of assets.
Seccurency raised a total of $64.5 million.
Securitize is a global platform for the issuance and management of security tokens or digital securities. The platform offers features such as investor accreditation, transfer restrictions, and shareholder voting, and is designed to comply with securities regulations in different jurisdictions. Securitize uses blockchain technology to create transparent and tamper-proof digital tokens that represent ownership in a range of assets, such as real estate, private equity, and debt instruments.
The total funding for the company is $100.2 million.
- Recently, Pennsylvania-based fund manager Hamilton Lane partnered with Securitize to tokenize its $2.1 billion flagship Equity Opportunities Fund V (source).
Bitbond is a Germany-based company founded in 2013, that offers a platform for the issuance and trading of digital securities or security tokens. The platform is designed to be compliant with securities regulations and offers features such as investor accreditation, transfer restrictions, and KYC/AML. BitBond uses blockchain technology to create digital tokens that represent ownership in a range of assets, such as loans and real estate.
Bitbond launched the product called Token Tool, a utility that allows users to create blockchain tokens on Ethereum, Polygon, Avalanche, and BNB Chain (formerly Binance Smart Chain) without prior registration. Users can connect their Web3 wallet via Metamask or Wallet Connect. With the “Manage Token” functionality, users can mint or burn tokens, pause them, and blacklist individual addresses. Additionally, Token Tool allows users to create a liquidity pool on popular decentralized exchanges, making DeFi more convenient and accessible for token issuers.
The total funding amount for Bitbond is $13.2 million.
Tokensoft is a US-based fintech company founded in 2017, that offers a range of services for the issuance and management of security tokens or digital securities. TokenSoft’s platform provides technology and consulting services for the entire lifecycle of a digital security, including onboarding, distribution, custody, and administration.
Tokensoft is expanding its technology to be available on-chain on Ethereum, Celo, Arbitrum, Optimism, Polygon, and Avalanche. The company’s open-source smart contracts will be in competition with other popular on-chain fundraising mechanisms, such as exchange initial DEX offerings and token launchpads. Tokensoft helps startups navigate the regulatory and compliance landscape around token distributions. This is important because startups raise millions of dollars by selling tokens to investors instead of equity.
Tokensoft raised $4 million to date.
The Legal Aspects of Real Estate Tokenization
In most cases, real estate tokenization is considered a security. However, often regulators have to make a decision about classification on a case-by-case basis. The key legal considerations include:
- securities law, which requires issuers to comply with securities regulations when registering tokens and disclosing risks and potential returns;
- property law, which raises questions about transfer of ownership, shared ownership structures and dispute resolution;
- tax law, which has implications for issuers and investors regarding treatment of real estate tokens and taxation of income and gains;
- AML and KYC regulations, which require platforms to verify investor identities and prevent illegal use of funds;
- smart contract and blockchain technology, which require the development of legal frameworks to govern use of smart contracts and ensure enforceability for blockchain transactions.
Additionally, real estate tokenization may also be subject to state real estate licensing laws and regulations, particularly if the company involved is providing brokerage or other real estate services.
The current state of real estate tokenization regulation in selected jurisdictions:
Security tokens, which are subject to regulation under the Howey Test, can become non-securities if they no longer require managerial efforts from issuers. The Howey Test stipulates that an investment contract exists when there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” If the token meets the criteria of the Howey test, they may need to be registered with the SEC or qualify for an exemption from registration, depending on the structure of the token offering.
Security tokens may also need to comply with the state securities laws and regulations, which can vary from state to state.
Several large banks, such as Citibank, HSBC, BNY Mellon, and Wells Fargo, teamed up with the Federal Reserve Bank of New York in November to digitize dollars for use in wholesale interbank transfers. The goal is to make the process of clearing and settling payments faster and to decrease the risk of failed payments (source).
Security tokens are subject to EU financial services regulation. Markets in Crypto-Assets (MiCA) is currently in development. The proposal aims to provide a harmonized framework for the regulation of crypto-assets, including security tokens used in real estate tokenization. While the regulation has not yet been adopted, it is expected to have a significant impact on the regulation of real estate tokenization in the EU.
Under the MiCA proposal, security tokens used in real estate tokenization would be considered “crypto-assets” and subject to regulation as such. The regulation would require issuers of crypto-assets to provide a whitepaper containing information on the issuer, the crypto-asset, and the risks associated with investing in the asset. In addition, issuers of crypto-assets would need to be authorized by a national competent authority in order to operate in the EU.
Under the UK’s Financial Services and Markets Act 2000 (FSMA), the Regulated Activities Order 2001 (RAO) sets out a list of activities that are considered “regulated activities” and therefore subject to regulation by the Financial Conduct Authority (FCA). Security tokens which provide rights similar to Specified Investments under RAO1 are regulated.
Firms involved in specified investments must register with and be authorized by the FCA. The FCA sets rules for how these firms conduct business, including disclosure, conflicts of interest, and fair treatment of customers. The FCA also protects investors from fraud, mis-selling, and other abuses related to specified investments. This includes ensuring that investments are suitable for different types of investors and that information about investment risks is clear and accurate. The FCA supervises firms involved in specified investments and can take enforcement action against those that do not comply with regulations and rules.
Financial Services Regulatory Authority (FSRA) determines whether a proposed token qualifies as security or commodity on a case-by-case basis. Security tokens are subject to securities law.
Companies in the UAE that want to issue or trade real estate tokens must obtain authorization and licensing from the FSRA by submitting detailed information about the company, its activities, and its management team and shareholders. The FSRA has specific measures in place to protect investors in digital assets, including real estate tokens. These measures require disclosing risks, providing accurate information, and ensuring that investments are suitable for different types of investors. Companies involved in digital asset activities, including real estate tokenization, must follow strict AML and CTF requirements, such as customer identification and verification, reporting, and record-keeping. The FSRA is responsible for ensuring the integrity of the digital asset market in the UAE, including real estate tokens, by monitoring trading activities and enforcing rules against market manipulation, insider trading, and other types of misconduct.
The Emirates Securities and Commodities Authority (“ESCA”) manages the regulatory framework for tokenized assets in the UAE. This includes the creation of tokenized real estate investment trusts (“REITs”) and other investment vehicles. To regulate tokenized assets, the SCA provides guidance on the classification of tokenized assets as securities, the issuance of security tokens, and the regulation of security token exchanges. As per the current regulatory framework, security tokens are classified as securities, and they are subject to the same regulations as other securities, including licensing requirements, anti-money laundering and counter-terrorism financing (“AML/CTF”) measures, and investor protection measures.
South Korea’s Financial Services Commission (FSC) has published guidelines on regulating blockchain-based securities (known as security tokens) under the country’s capital markets rules. The guidance clarifies that stablecoins and digital assets that have no issuer and do not have to “fulfill the obligations commensurate with the investor’s rights” will likely not fall under the definition of securities. The guidelines come ahead of anticipated regulations that will institutionalize security tokens, as part of Korea’s comprehensive efforts to regulate its crypto and blockchain sector. Lawmakers are currently discussing 17 separate crypto-related legislative frameworks, with the goal of creating a Digital Asset Basic Act (DABA) that will serve as an all-encompassing legal framework for the industry.
The website of the Monetary Authority of Singapore (MAS) features a section dedicated to the digital tokens. According to the “Guide to Digital Token Offerings”, MAS “examines the structure and characteristics of a digital token in determining if the digital token is a type of capital markets products” similar to the FSRA in UAE. Notably, utility tokens and payment tokens don’t fall under SFA legislation.
To conduct real estate tokenization in Singapore, the issuer must obtain approval from MAS and comply with the Securities and Futures Act (SFA) and Financial Advisers Act (FAA).
In addition, MAS requires that real estate tokenization platforms be licensed as digital asset exchanges or as financial advisors. The platform must also have appropriate measures in place to manage risks, protect customers’ assets, and comply with anti-money laundering and counter-terrorism financing regulations.
MAS also requires that the issuers of real estate tokens disclose all relevant information to potential investors, including information about the property being tokenized, the terms of the token offering, and the risks involved. This is to ensure that investors are fully informed before making investment decisions.
MAS launched Project Guardian in late-2022, a blockchain-based asset tokenization pilot, in collaboration with financial institutions like JP Morgan Chase, DBS Bank and Marketnode (SGX joint venture for bonds) (source).
Recent Funding Rounds
The only two publicly disclosed valuations are ADDX (Series B, $290 million, November 2022) and tZERO (also Series B, $1.0 billion, August 2022). According to Dealroom estimations, Tokeny Solutions ****was valued at $22-$33 million when it raised €5 million in January 2022, and Securitize was valued at $192-$288 million in its Series B round in June 2021.
Real estate tokenization is a case where blockchain can theoretically offer extremely high utility by addressing the structural limitations of the real estate market, such as limited liquidity, inefficient pricing, high management costs, and lack of flexibility and transparency. In a recent opinion piece for CoinDesk, John Rizzo, who used to work for the Treasury, explained that tokenization can help more people own assets like real estate, which can lead to long-term financial gain across generations:
Generational wealth is often created through illiquid assets, such as real estate. There’s no question that accessibility to the stock market through savings vehicles, such as 401(k)s, has had a substantial, positive impact on the economic livelihoods of Americans who primarily earn their living through a paycheck. It’s also true that long-term wealth creation can be augmented through investments in illiquid, alternative assets. So what if market participants and policymakers support the tokenization of those illiquid assets and create pathways for the average American to invest in a piece of them? All of a sudden the gains that a person can achieve in a lifetime of working are multiplied.
… public officials in Washington [D.C.] have an opportunity to come together and focus on powering a revolution in alternative assets that unlocks the storied American Dream for millions.
We mentioned two cases of federal agencies endorsing asset tokenization (the Monetary Authority of Singapore (MAS) and the Fed) by partnering with financial institutions involved in asset tokenization. Currently, these are isolated cases that only happen with a small number of well-regulated institutions that it works with closely every day.
The G20 Financial Stability Board report issued in February highlighted DeFi ‘vulnerabilities’, and mentioned that DeFi attempts to “replicate some of the functions of the traditional financial system, [it] inherits and may amplify the vulnerabilities of that system” (source). This likely describes the current sentiment of regulators towards real estate tokenization. The collapse of FTX, Voyager Digital, Celsius Network et al also played a role in influencing the attitude towards tokenization.
Another argument against the possibility of the mass adoption of real estate tokenization is that each transaction is unique and requires tailoring to the needs of individual investors, lenders, and tax authorities. This implies that tokenization may be limited to certain types of transactions, property, and jurisdictions.
The crypto industry has been facing a challenging period of declining prices and investor confidence, but on-chain asset tokenization might offer a new avenue for growth and value creation. It may be reasonable to rely on jurisdictions such as the UAE and Singapore to boost the market and tackle the obstacles imposed by US and EU regulators by offering less stringent requirements and partnership opportunities to asset tokenization platforms and financial institutions that are interested in launching tokenized assets.
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