Real estate has always been one of the most valuable assets on the market, and the tokenization of this type of property has marked a turning point in the sector. To be clear about the concepts, it is worth remembering that a token is a digital object that represents a value or an asset and is registered on a blockchain. A token can be, for example, a digital representation of something that exists in the real world. It may even be a representation of a right acquired under a contract. This opens up a range of possibilities in the real estate market.
Real estate has always been one of the most valuable assets on the market, and the tokenization of this type of property has marked a turning point in the sector. To be clear about the concepts, it is worth remembering that a token is a digital object that represents a value or an asset and is registered on a blockchain. A token can be, for example, a digital representation of something that exists in the real world. It may even be a representation of a right acquired under a contract. This opens up a range of possibilities in the real estate market, but does what the registry says still apply?
How does the legal business of tokenization work in our legal system?
Tokenization is a new digital way of representing anything on the blockchain, mainly rights, since an asset itself cannot be represented. What is really being represented is the right to that asset. Tokenizing real estate, for example, means tokenizing a real interest in that property. The tokenization sector in our legal framework is not homogeneous; each sector or the specific regulation of each sector would have to, or rather, should, regulate it (since most of them are not doing so yet). An example can be found in a regulated sector, such as the stock market. In March, a law was published stating that tradable securities are no longer only represented by entries in accounts and securities, but can also be represented by tokens. Another example is observed in the commercial sector. The European regulation known as the Pilot Regime establishes that EU countries must recognize tokens as a new way to represent the shares of a public limited company.
But what is real estate tokenization?
Specifically, the real estate sector has not yet recognized tokens as a new way to represent real rights. However, just because a sector does not explicitly recognize tokenization does not mean that things cannot be tokenized within that sector. It simply means that there will be less legal certainty.
Answering the question, tokenizing real estate, according to our legal system, is not currently possible because real estate is a physical asset that cannot be tokenized. What can be tokenized is a right over that physical asset. Furthermore, our property rights are strongly regulated, and both the granting and modification, transfer, and termination of these rights require a public document. In addition, for it to have effects on third parties, registration in the property registry is also required.
If we wanted to tokenize with the same legal certainty as the current system, it would be necessary to include in a public document that a real estate property is encumbered with a token and that the new form of traditio (transfer of property) is the delivery of that token (in digital form), which should be recorded in the deed. With these two conditions, it would be understood that the person is the owner. However, if the purpose of tokenization is to streamline processes and reduce bureaucracy, there is little point in tokenizing real estate if I still have to go through a notary and a registrar.
Do you think that blockchain technology facilitates the democratization of the real estate sector?
Currently, tokenization is not being carried out with real rights. Instead, other types of rights are being tokenized, such as credit rights or other rights of an economic nature, where the variable interest is the future income from the sale of the property or rental income. The future economic right related to the sale of a property is also being tokenized, but the real right itself has not yet been tokenized. However, when regulations change, my answer is yes, it will be possible to tokenize real rights.
What are the main advantages?
In fact, if the scenario were to change, it is most likely that the new circumstances regarding the property underlying the new title represented by the token would be automatically and quickly recorded in the land registry. Speed, cost efficiency, and transparency would be the advantages of such a system.
What do you consider more advantageous, real estate crowdfunding or tokenization?
Currently, crowdfunding works well, and its operation is widely known. However, the modus operandi of current real estate tokenization platforms differs, as in most cases, the token is not owned by the individual investor, but rather by the company. There is still a lack of sufficient legal certainty in this regard. However, in a matter of months, this is expected to change, and we will witness a new scenario with greater legal security, greater liquidity, and other benefits.
Is the original property released from the original owner?
In Spain, this is not changing, and there is no current indication that it will. We continue to follow the theory of “title and manner,” which means that to transfer property, you need a contract and a symbol that represents the transfer of possession (such as a public deed, the delivery of keys, or potentially in the future, the delivery of a token).
How do platforms specialized in the tokenization of these assets work?
These platforms often allow both parties to the real estate or rental transaction to benefit: the landlord and the tenant.
For example, they allow the landlord, who has a rental contract and needs liquidity, to offer for sale a token that represents the rent they will receive in the next 12 months through an auction system. The platform also guarantees payment. Without a doubt, it is a great idea.
But what are the legal limitations?
Rather than limitations, there are a multitude of requirements that must be met, which can create some barriers to entry. These requirements may include some aspects such as regulations on public offerings, secondary market considerations, the need to obtain authorization to operate and more.
Is there legal certainty regarding hacks in blockchain networks?
There are different ways of understanding security. Hacking the blockchain is a challenge, but that risk will always exist. It is important to consider that today, the company that provides the token to the investor has backup systems. If you lose your tokens, new ones can be generated for you, invalidating the previous ones.
What legal challenges will the sector have to overcome in the medium term?
In the stock market sector, when it comes to the primary and secondary token markets, even if the underlying asset is real estate, what you are buying is a content economic right, that is, non-real rights. In the coming months, the regulator must clarify the requirements that the entities involved must meet. However, if we refer to the real estate sector itself and want the token to represent the real right, many things would have to change, so it is a long-term goal.