In terms of providing liquidity, various technical support is the foundation, and it also needs to be matched with appropriate financial instruments.
Original title: “Technical and business factors that determine the liquidity of US real estate certificates”
Written by: Gu Yanxi, founder of the American Liyan Consulting Company, a researcher and practitioner in the blockchain and encrypted digital asset industry
Real estate assets are characterized by large assets and poor liquidity. This is a persistent problem. But in economic activities supported by centralized computing systems, this problem cannot be solved. The centralized computing system supports the company’s respective centralized operating models. The resulting business process is the same. This also determines the various roles in the securities market and the mode of cooperation between them. The current market structure (that is, its cost and efficiency) can only support the trading and circulation of large single assets such as equity. For asset types such as real estate, which are small in size and have different characteristics for each individual, the current securities market cannot operate such types of assets in a standardized way. Such a market basis also determines the corresponding regulatory regulations, which further restricts the circulation of real estate assets. In order to protect ordinary investors, US regulatory regulations classify real estate as alternative assets. The corresponding financing and circulation are also restricted to a small number of user groups with more investable assets.
The emergence of Bitcoin and Ethereum and their global trading and circulation have given the market the opportunity to make assets such as real estate into small standard units and circulate them on a global scale. Such improved liquidity can first revitalize assets deposited in real estate. The improvement of liquidity helps the price of real estate assets to obtain a liquidity premium, instead of discounting transactions that are usually due to lack of liquidity. The improvement of liquidity can also enable ordinary investors around the world to participate in the holding of high-quality real estate and to obtain benefits from its appreciation. Based on these judgments, the American market has been constantly making various attempts to use blockchain technology to improve the liquidity of real estate assets. In fact, this is not only the case in the US market, but the application of blockchain in real estate assets is already a global consensus. Exploration in this area has already begun in some countries. Some are providing the required technical means, and some are providing transaction services. Of course, there are also more direct efforts to directly certify real estate for trading and circulation.
The factors that improve liquidity can be divided into two aspects: technology and business. The two aspects must basically develop simultaneously in order to realize the application of this aspect as quickly as possible.
In terms of technology, the first thing to do is to choose an open source underlying technology framework . Then there are applications that support all stages of the full life cycle of real estate assets, including the generation, registration, trading and settlement of real estate tokens. This is actually the financial market infrastructure (Financial Market Infrastructure, FMI) of the real estate token market. The basic components of this market must be perfect and able to cooperate with each other in order to provide a solid foundation for the circulation of real estate certificates. Since 2018. The real estate token market in the United States has been continuously improving in this regard. From the initial token generation tool and trading platform, it has developed to include registration and custody functions today. Cooperation between these functions is also taking shape. However, the construction of these market infrastructures is still in progress, and there is still much room for improvement. For example, in terms of trading platforms, the current trading service is provided by the ATS platform, and there is no national securities exchange. The absence of such an exchange greatly limits the liquidity of American real estate assets. Such a restriction is pushing the US real estate market to develop internationally, including the establishment of digital asset exchanges overseas. The development of internationalization can truly bring out the greatest value brought by blockchain technology, and internationalization is also the main trend of current economic development. Therefore, the international development of the US real estate token market is caused by domestic conditions, but it is in line with technology application trends and commercial development trends. It’s just that in terms of the order of implementation, the status quo forces the participants of the US real estate token to start this step ahead of schedule. In fact, this situation is not only the case in the United States, but also in other countries.
In terms of business, we first need to determine what kind of assets are tokenized. I think real estate investment in private equity funds is the best way to generalize . Such a token can reduce the cost in the investment process and realize the scale effect of investment.
Among the various factors that determine the success of the real estate token business, the user group that can participate is the key to the success of this business. In the US market, due to the restrictions of relevant regulations, the circulation of real estate tokenization can only be used by qualified investors in the United States. However, qualified investors are a very niche group in the United States, so the current hope for the liquidity of American real estate comes from American overseas users. Within the scope of the existing conditions, the service provider of the US real estate tokenization must adopt various methods to improve this process. This process includes the initial financing of real estate investment and subsequent circulation in the secondary market. It is very similar to the business process of stocks. In this respect, a significant difference between this application and the securities market is the use of digital currency. In the securities market, because only legal currency can be used for transactions, the transactions of US overseas users involve transfers between banking systems in different countries. Therefore, this process has many restrictions, high costs and low efficiency. Due to the characteristics of blockchain technology, digital currency can be directly paid and traded on the chain. This is very helpful for the circulation of assets on a global scale, including real estate assets of course. In order to increase the liquidity of US real estate assets, service providers in the US real estate tokenization market need to include stablecoins in various related applications.
In terms of providing liquidity, various technical support is the foundation, and it also needs to be matched with appropriate financial instruments. However, it is transaction users that ultimately provide liquidity, and direct service to transaction users is the last and most important link in this business process. The organization that provides this service must be the organization in the region where the transaction user is located. How the American real estate token asset providers obtain the cooperation of these institutions is therefore an important part of this business process. In the traditional way, the relationship in this aspect is the relationship between product providers and channel parties. Although this model can still be applied to the real estate token market, a more long-term effective way is the alliance approach, that is, channel parties in various regions jointly operate this market. Such a method is not only a trend in the development of commercial organizations, but also the best organization form supported by blockchain technology. If all aspects of the design are correct and executed correctly, such an organization can establish a dominant market position in the global real estate token market.
In short, the improvement of liquidity is the ultimate goal pursued by the US real estate token market. In order to achieve this goal, further improvements are needed in terms of technology and business models. Compared with two years ago, this aspect has been greatly improved, but it is far from forming an applicable technology and business model. There is a lot of room for improvement in these two aspects. This also means huge business opportunities.
For participants in this market, it is more important to make the right choice in terms of technical foundation and business model than to complete several financing projects for real estate certificates.
