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First, to be sure, we’re not talking about cryptocurrencies as you commonly hear about. We are talking about real property, fractionalized, and put on the blockchain.
You see, blockchain is the underlying technology that makes digital shares of real estate so different. In simple terms, tokenization is the digital representation of the underlying asset, allowing us to put it on the blockchain – in this case, real estate.
So, in addition to having the deed of ownership to the real estate, you also have digital ownership in the form of a token or what we call a security token. For example, if there are 10 people that own the property, you could have 10 tokens that represent the ownership. These digital shares or tokens live on the blockchain as digital ownership interests in the property.
For you investors out there, let’s say you have a syndicator or a sponsor of a real estate deal that puts the real estate into an LLC, and investors buy shares of ownership in that LLC that owns the property. This is traditionally done with a certificate showing ownership. So when we say tokenization, we’re just talking about a digital representation of those shares. For example, let’s say the LLC that owns the real estate is turned into a million tokens and you own 1%. You now own 10,000 tokens. This is important because now you’ll be able to sell 1,000, 2,000, or 5,000 of your tokens in the future. The tokens or the digital shares of the LLC are backed by an actual asset, which is the real estate that the LLC owns.
Now there are different types of tokens to be aware of, called utility tokens. These tokens are not asset-based. Think of these as your favorite airline frequent flyer miles program, where you do something or buy something and you get rewarded for it. This is not what we’re talking about here today. We’re talking about fractional ownership, digital shares of the real estate. In fact, these are securities and must fall in line with SEC regulation, and that’s why we call them security tokens.
I’m not going to get into the future of tokenization in this video, but something to know and research if you like is that pretty much everything in your life is going to be tokenized and put on the blockchain. Libraries license, airplane tickets, marriage licenses, college degrees, and of course, your real estate. An analogy I’ve heard used is it’s like QR codes and your phone. You’ll show up, it’ll be on the blockchain, it’ll be scanned. Think about real estate appraisals being on the blockchain, environmental surveys, and insurance claims – all of that will now be on blockchain.
Okay, let’s stop right there and get to the point. You may be asking yourself why. Why do I need to have everything tokenized, and why do I need my real estate investment tokenized?
Well, let me just give you the top 10 benefits of real estate tokenization. We’ll deep dive into these in a future video, but I at least want you to have our top 10 list.
You see, what makes these features better, or in some cases possible for your real estate, is the blockchain technology.
Now, this is also not a video about blockchain, but let me at least give you an analogy so you can understand what it is from a high-level view and how it works.
Blockchain is what’s called digital ledger technology. What’s an example of a digital ledger? How about an Excel spreadsheet? Now I’m oversimplifying it for the basic nature of this video, but you can think of blockchain as a digital ledger that is immutable, meaning it’s virtually impossible to change. Once it’s on the blockchain, it’s there permanently. So blockchain, like a digital spreadsheet, tracks all the information for the property and has a consensus, meaning everyone agrees that it’s accurate and has visibility to it.
The bottom line is transparency is the future, and if you don’t jump aboard, it can be more difficult in the future to bring in investors. For example, if you’re raising capital for an investment project, do you think the investors will be more inclined to invest in projects that have transparency and immutability on the blockchain? Or the deal that the syndicator or sponsor doesn’t provide full disclosure of, maybe just their performance and that information is held on their personal computer, where it can remain hidden or be changed.