Most retailers have yet to fully embrace blockchain technology. Perhaps for good reason. Applying new technology, particularly that aimed at changing legacy systems, comes with certain risks. That being said, cryptocurrencies and blockchain have the potential to transform retail and commercial real estate. As previously shared by the Hunton Retail Industry Law Blog, blockchain can be used to streamline inventory management, administer consumer loyalty programs and authenticate high-value assets or the supply chain, generally. Blockchain can also be used more simply to boost consumer sales or process tenant rent payments. Shifting away from the consumer end of retail, below are some novel ways blockchain technology, specifically tokenization, can modernize real estate acquisitions, dispositions and financing.
Tokenization – Secure Chains of Title
Tokens are digital rights to assets, securely recorded in a public ledger. Literally everything can be tokenized, including ownership interests in real property. In the context of the acquisition or disposition of real property, a fee interest or a leasehold interest in real property can be tokenized. Time-stamped records such as deeds, encumbrances, parcel numbers and surveys can be embedded into tokens, such that chains of title are secure and records are readily and cheaply available. The same technology used to verify the authenticity and source of a diamond can be implemented to verify ownership of title. Indeed, many state and county land records have started developing blockchain land and title records. Further, tokens can be programmed to automatically generate deeds upon a transfer, and tokens can easily and securely be transferred 24/7, circumventing closing costs.
Tokenization – Rethinking Liquidity
Fractional ownership interests in real property or assets can also be tokenized and sold to investors. Exemplifying the concept that anything can be tokenized, NBA point guard Spencer Dinwiddie recently tokenized his three-year $34 million NBA contract into 90 fractional ownership tokens named SD8 coins (after Dinwiddie’s initials and jersey number). Basically, SD8 coins are bond-backed security tokens sold to investors. Investors are paid monthly dividends, which are programmed into the tokens, from Dinwiddie’s salary with a three-year maturity. In exchange, Dinwiddie receives up-front capital from said investors instead of payments spread over the three years of his contract. Fractional ownership tokens in real estate can work in a similar way. Divvying ownership through REITs or equity shares is not new. However, as shown by the SD8 coin example, tokenization can make previously illiquid assets liquid. Like SD8 coins, fractional tokens can be programmed to automatically pay dividends or rental distributions, generate smart contracts, keep auditable records and enforce transfer restrictions through maximum token transfer limits and KYC/AML requirements. This lowers the transactional costs that typically gatekeep retail investors out. Through blockchain, fractional interests in real estate are liquid assets tradable to a more diverse pool of investors on a true 24/7 peer-to-peer market.