Analyzing the potential of securitization in real estate: exploring the tokenization trend | Opinion
Disclaimer: The author’s views and opinions expressed in this article are their own and do not necessarily reflect the views and opinions of the editorial team at crypto.news.
Real estate tokenization has gained popularity in the crypto industry, but it is important to understand its limitations. While it is classified as a security in jurisdictions with developed financial regulations, such as the United States, European Union, United Kingdom, and Australia, the concept of tokenization should focus on digitizing property rights rather than solely penetrating land registries.
Traditional real estate investment has been challenging for smaller investors due to its illiquid nature and high upfront investment requirements. Blockchain technology offers a solution through the tokenization of real estate, which involves converting real-world assets into digital tokens tradable on a blockchain. This subdivision of assets into smaller units aims to make investment more accessible and increase the liquidity of real estate by allowing easy trading on secondary markets.
However, a critical examination of tokenization’s limitations reveals the need for a thorough redesign of the land system to ensure meaningful progress. Tokenization essentially represents securitization, where tokens represent shares or units in a special purpose vehicle (SPV). This security is an economic interest in someone’s property, but the security holder does not enjoy the full bundle of legal rights, limiting its economic application.
Securitized real estate represents only a small fraction of the overall property market, highlighting the disparity between tokenized assets and the broader market. Real estate prices do not fluctuate dramatically like company stocks, making substantial gains from tokenized property unlikely. Publicly listed real estate investment trusts (REITs) democratize real estate investments, but they have lower daily trading volumes and exhibit lower volatility compared to the broader stock market.
The excitement around real estate tokenization may be irrational, as tokenized property is unlikely to make substantial gains while the rest of the real estate market stagnates. However, digitalization of finance can reduce transaction costs and make security markets more transparent and accountable. Innovations can make the REIT market more efficient if accompanied by progressive regulations.
Empirical evidence supports this discussion, showing that the tokenized real-world asset market is much smaller compared to the cryptocurrency market. The securitization of real estate is not a revolution, and speculative excitement around tokenization is far-fetched. The bottleneck for the future of the digital economy lies in the old-fashioned land registries and bureaucratic processes. Improving these systems through automation and digitization is crucial for the further evolution of the economy.
In conclusion, while securitization and tokenization have their place in the real estate market, they do not revolutionize the industry. The focus should be on digitizing property rights and improving the outdated land registry systems.
