Tokenizing Real Estate Won’t Make It Less Stable

3 June 2020

The main points:

  • Many analysts expected that after withdrawing of the friction from property deals with tokens could quickly raise institutional money and liquidity. However, as a result, everything is moving way too slowly. 
  • Earlier this year, trading giant DRW Holdings failed to support a $20 million tokenized property deal. Moreover, nobody was looking for permission to assign ownership from senior debtholders. 
  • The United States Securities and Exchange Commission studied Factor 805 in a detail, that is connected with tokenization of various Brooklyn condos that implemented MakerDAO’s stablecoin Dai and then allowed the project. 

We offer you a check of reality or realty in our case for those people who truly think of tokenization as some kind of religion. 

More and more ski resorts, college dorms, and upmarket apartment blocks in Manhattan wait in line to change the commercial mortgage market. Thus, the thought of mixing U.S. real estate and blockchain tokens started to show at the beginning of this year. 

After the circus with an initial coin offering back in 2017, the second line of adult investors are going to issue loans and earn money with the help of blockchain-based tokens. This situation will lead to big disintermediation of bankers and middlemen. 

Some experts believe if they use a controlled approach, providing soi-disant security tokens to choose a specific group of investors, then they implement liquidity with no frictions into the property’s legacy system of finance. 

These grand expectations and hype were capsuled in a joint venture between digital broker-deal Propellr that is focused on assets and tech providers Fluidity (supported by Galaxy Digital chief Michael  Novogratz and Consensys chief Joe Lubin). 

Numerous media coverage at its launch also had a video on Bloomberg where was a well-known real estate broker Ryan Serhant. He stared in a television show called “Sell It Like Serhant”). In that video, Serhant discussed the new fields for tokenization may bring for investors. However, constant destabilizing of the multi-trillion dollar property market is expected as never before. 

To emphasize their disappointment, Propellr and the Fluidity project were peacefully closed at the beginning of the year. Moreover, their joint venture was not officially finished and launched. Since then these two firms have drifted apart. 

Both parties are still going to discuss certain points of the venture’s closure. However, both of them have agreed that the tokenized market is still not ready for such cases. At that time the market was not developed enough. Moreover, it did not possess the needed institutional appetite. A co-founder of Fluidity described the collaboration with the Propellr as a prospective joint venture. Fluidity was only a minority shareholder. 

Choice of adverse 

Choice of adverse
Choice of adverse 

At this point, trading structured transactions and private location in assets like it can be real estate is not so widespread. Furthermore, the price for such trading is generally lower than the net asset value. Investors saw tokenization as a variant to erase possible friction around the assignment of ownership and push liquidity in other secondary markets. 

STOs or security token offerings are usually controlled with financial instruments. STOs are even realizable fit for the full or partial tokenization of real assets like real estate. At the very least it is written so on paper. While extensively using an exemption in American securities law that is known as Regulation D, STOs manages like private placing. As a rule, it permits small companies to earn profit by selling debt securities or equity to certain investors without a need to face difficult registration process. 

If we look closely the only thing that is missing in this brand new economy is an institutional capital. Todd Lippiatt, the CEO of Propellr believes that tokenized real estate has come with an untruthful promise. Moreover, it is originally coming from a verbiage mixture. While many insist it as liquidity in reality it is just market access. 

It is a widespread practice when institutions request to see liquidity before moving forward and readjusting their back office. In the meantime, issuers need to implement tokens into the correct market to assert their thesis that goes with the chicken-and-egg question. 

In substitution of institutional partaking, all this hype resulted in phenomena known as adverse selection. Besides, it has attracted investors who did not have other options but to earn capital or who has spent many funds while developing blockchain token infrastructure and planned to follow out with one of their projects. 

Lippiatt believes that at some point the interest in tokenization has reached $3 billion worth. However, as soon as it began to filtrate through all of it, many people decided that they wanted to earn money for some unsuccessful deals. 

Harbor’s hiccup

If you looking for someone good with rethinks and hiccups then Fluidity and Propellr are the best options. The real estate trading firn DRW Holdings and startup Harbor clench a bargain to tokenize $20 million worth of student housing. According to the Block, earlier this year, this bargain fell.  

One of the familiar with the condition and situation said that there was a basic blunder that derailed the deal. Both parties missed the fact that a no-transfer condition that was written into that mortgage on the real estate, and even the holder of senior debt, U.S. Bank based in Minneapolis, did not get permission to assign ownership. 

Harbor has a spokesman who has withdrawn from crowdfunding and opted for the role of a pure technology provider. Recently he has affirmed that a lender does not have to give his or her permission to transfer the loan. Moreover, the spokesman believes that the initial problem was not connected with tokenization. 

Neither U.S. Bank, the lender, nor DRW, the possible token issuer in this deal, commented on the case by press time. However, in April there was a situation when Evan Lapiska, a spokesman of U.S. Bank, said it had no more strong and current interest in real estate, better known as the Hub at Columbia, South Carolina. 

Everything depends on the way how you percept it. If you are satisfied with the market only using some blockchain technology and subscription book that only shows the size of a continuing clash between old and new ways and the level of immaturity of the investment paradigm.

Okay boomer

Fluidity has lost its interest in tokenizing apartment blocks. Since then it has turned its attention to Portfolio, discovering decentralized loans making use of the MakerDAO multi-collateral Dai system and pledging American Treasuries as collateral. Experts expect a new Fluidity product to be launched next month. 

On top of that all, Tabar’s forecast on the lifeless nature of the real estate market relates to a vast generational deadlock. Many boomers who possess a great center of power, as a rule, do not want to change their style in their careers. Moreover, they wish all systems to be the same so that they can still benefit from it and make sure they have a good retirement. 

While the two firms were still working together, A co-founder of Fluidity Michael Over and Lippiatt wrote together a paper where they analyzed the issue of tokenization, how it can be solved in private placements. 

The idea included two different tokens: one junior that has in priority payment that replicates equity and the one senior that has in priority of payment that replicates debt.  They thought of connecting a full accounting transaction to the final token layer so their security could be appreciated. 

Lippiatt adds that equity is not the only in real estate. As a rule, you possess the real estate plus any possible cash flow that you receive, the history of payment, and minus owed debt you have. All this adds to your wish to how you want to estimate something. 

If we look back at the past, we are going to notice a special focus to detail (in addition having specific compliance requirements incorporated into smart contracts), helped the companies when the Securities and Exchange Commission (SEC) horned in.  Lippiatt remembers the process of tokenization of a loan called FACTOR-805 that was an apartment block based in Brooklyn. That was the first asset from the real world to implement Dai, the stablecoin of MakerDAO.

With the acceptance of Dai on the level of fiat money and distribution of Dai in a form of interest payments, SEC has become more interested in it. As a result, it visited Propeller and spend time interviewing the company’s team and analyzing the transaction. 

In the middle of August, the company had one more interview with the SEC. Securities and Exchange Commission said at that time that they had no issue with the way Propeller coped with a bargain. Put it another way, they approve. Thus, they hope they have been lucky to create a new policy. 

Hope is the last thing to die

Tokenized mortgage
Tokenized mortgage

All in all, Propellr is still focused on MakerDAO and possibilities of multi-collateral Dai. Now it continues to focus on a tokenized mortgage pilot with Centrifuge that is based in Berlin. For now, it is the best blockchain partner. 

Lippiatt believes that soon is going to be a new stage with much better protocol layers. Moreover, this new stage will tackle problems with privacy that concerns people the most. This issue especially relates to the mortgage field. Experts hope that everything will turn out successfully. Moreover, there is a wide range of intriguing projects that reduce to nothing real estate. Among them are AssetBlock, Securitize, Fundament, Smartlands, Bits of Property, etc.  

Harbor that located in San Francisco, has evolved from its earliest crowdfunding model. Recently it has supported the tokenization of $100 million worth of real estate capitals in connection with the manager of those capitals, iCap Equity. CEO of Harbor, Josh Stein, adds that they have some stuff in the process of production. Moreover, the company has clients with strong tokenized securities and even it works with trades in real estate. However, are they sold like hotcakes? The answer is negative. 

Josh Stein confessed that people may feel disappointed with all that hype, however, the situation is not as bad as people may believe. It is only a normal process of technology implementation.

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