From the perspective of technological development, compliance requirements, and market demand, US real estate will first be tokenized.
Original title: “American Real Estate Association is the first digital asset to be circulated and traded worldwide”
Written by: Gu Yanxi, founder of the American Liyan Consulting Company, a researcher and practitioner in the blockchain and encrypted digital asset industry
The current encrypted digital currencies represented by Bitcoin and Ethereum are essentially virtual digital assets. Their value is entirely the result of market consensus through transactions. These encrypted digital currencies are not supported by any underlying assets. Although they have a very high trading volume on a global scale and have formed a very high market value through trading, these virtual digital assets have not had any impact on the real economy.
Another rapidly developing digital financial product is digital currency. The digital currencies currently circulating in the market are all digital stable currencies based on a single legal currency. At present, the fiat currencies based on this type of digital currency in the market are all U.S. dollars, such as USDT, USDC, PAX, GUSD, TUSD and the upcoming Libra digital dollar stable currency. Therefore, from the perspective of digital financial products, there are currently encrypted digital currencies that are not linked to any physical assets and digital stable currencies based on existing legal currencies. In terms of the digitalization of financial products, what has not yet appeared is a digital form based on physical assets, or tokenized assets. Among all the current asset types, I think the physical assets that are most likely to be tokenized first are real estate. The first real estate in this regard must be real estate in the United States.
First, in terms of market demand, real estate in the United States is the same as real estate anywhere else in the world, and its trading and circulation are very inconvenient. For ordinary investors, they cannot directly participate in the partial ownership of a commercial real estate, nor can they directly participate in the transaction of commercial real estate. Even when a real estate transaction is in circulation, the transaction process is very cumbersome, and the completion of the transaction process takes days or weeks. Due to the inconvenience of transaction circulation, a large amount of funds are locked in real estate, and the use of funds in this area is very inefficient. The asset type of real estate is in sharp contrast with the asset type of company equity. The company’s equity has very strong liquidity, and ordinary investors can participate in the company’s equity transactions.
One of the main reasons for the inability of convenient circulation of funds in real estate is the weakness of current technical support. The securities exchange market based on a centralized computing system can only support asset types such as stocks. The characteristics of real estate are that a single volume is small, and the number of asset units that can be subdivided is small. Therefore, the number of investors who can hold this asset is small, and the demand for a single volume of transaction assets in the secondary market is small. However, this feature is not good at supporting centralized trading systems, and the cost of providing trading services in this area is too high.
The emergence of blockchain technology is fundamentally changing the existing securities market. An important change in this regard is the ability to make assets into small transaction units. Since many tasks in the life cycle of digital assets can be completed through blockchain technology, the cost in this area is greatly reduced. More asset types can be traded in this way. For real estate, the rights and interests of a single real estate with a volume of millions of dollars can be made into a standard small transaction unit for trading in the secondary market in this way.
Blockchain technology provides technical possibilities for the transaction and circulation of real estate. Since 2018, some regions in the world have begun to use this method to tokenize real estate for trading and circulation. The biggest obstacle to this effort is the limitations of regulatory regulations and the inadequacy of the corresponding market infrastructure. So so far, progress in this area around the world has been very slow. But in this area, the US market is in a leading development stage, so it is very likely that the tokenization of US real estate will be far ahead of other regions in the world.
In terms of compliance, the circulation of real estate in the US market needs to be carried out in the form of alternative assets. This is how we usually know Reg D and Reg S. According to this regulation, real estate in the U.S. market can be tokenized, and then funds can be raised from qualified investors in the U.S. and overseas investors. The ATS system in the US market can provide trading services for these tokens. The transfer agent in the US market can provide a one-to-one correspondence between physical assets and digital tokenized assets. Recently, a new no action letter issued by the SEC agrees that ATS will further simplify the settlement method of digital assets, so this will further benefit the development of market infrastructure services in this area.
In terms of technical system support, in 2018, technical platforms that provide corresponding services began to appear in the market, such as a token generation platform for asset token generation and a crowdfunding platform for raising funds from investors, and of course there are A pass trading platform that provides trading services. However, in 2018, due to the just beginning, the cost of related services was high and the services provided were not complete. In addition to the imperfect business process and low market awareness, in 2018, Development has not developed.
After two years of development, the service of the underlying technical infrastructure has been greatly improved, and market awareness has also been greatly improved. Although the corresponding regulatory regulations have not changed, the development in this area in the market has begun to show a strong momentum of development. The real estate tokenized product providers and market demanders have begun to make more efforts to develop this business.
In terms of real estate digital product generation, more real estate in the market uses this method to finance under the premise of compliance. Some of these assets can generate an annual return of more than 10%, and the investment threshold is greatly reduced. For example, tens of thousands of dollars can participate in the purchase of such products. Such an asset type is attractive to many investors, and more importantly, they can participate.
In terms of buyers of this asset type, the main buyers will not be American investors, but American overseas investors. Because according to Reg D, American investors must be qualified investors. In this way, the US investor base is very small. However, according to Reg S, there is no such restriction for US overseas investors. For American overseas investors, it is very attractive to own American real estate and obtain sustained and stable income. The issuer of the digital tokenization project in the US real estate has a very clear understanding of this, and they will also focus their marketing on American overseas users.
Prior to this, in addition to the conventional transaction methods, there is another way for US overseas users to invest in US real estate, which is to invest in US real estate through EB5. But the minimum threshold for participation is $500,000. Coupled with other costs, the threshold for investment is still high. Now using a generalized approach, the threshold for US foreign investors to participate in this business is only tens of thousands of dollars. In addition, because the ATS system provides secondary market transactions for this type of token, the liquidity of this type of asset is also greatly improved than before. These factors are very attractive to overseas users.
In short, from the perspective of technological development, compliance requirements and market demand, real estate in the United States will be the first digital financial product to be tokenized and developed on a global scale. Compared with other regions in the world, the US market is clearly in a leading state of development.
