The world of bitcoin and blockchain continues to evolve and grow – fascinate and sometimes intimidate. A watershed moment happened in January when the financial regulator in the US approved the first bitcoin ETF or “Exchange Traded Fund”. This is a long established, standardised investment vehicle that gives investors arms-length exposure to an asset. Via the ETF, investors in the US can get exposure to bitcoin using a regulated broker without having to buy and host bitcoin themselves.
With a clear regulatory framework, trusted fund platforms have jumped on the bandwagon. Names such as Blackrock and Fidelity have each launched bitcoin ETFs and in so doing create new demand for this new digital asset. Blackrock’s launch soon became the fastest growing ETF in history hitting $15 billion of value in the fund within 10 weeks. The market has taken notice – bitcoin started the year priced at $44,000 per coin and is now trading at more than $70,000.
Larry Fink, chief executive of Blackrock, declared that the launch of bitcoin ETFs is “step one in the tech revolution in the financial markets. Step two is going to be the tokenisation of every financial asset”. Tokenisation refers to the digital transformation of asset ownership on to blockchain infrastructure. When bitcoin is bought or sold between parties, the exchange takes place on its own settlement platform, referred to as the bitcoin “blockchain”. Applying this settlement approach – a blockchain approach – to other assets is the step two that Mr Fink refers to.
Today, financial assets require countless administrators to transact successfully. Conversely, every day $30 billion worth of Bitcoin changes hands between buyers and sellers without the need for any human intervention. The software that runs the blockchain infrastructure ensures that a successful exchange is achieved automatically without any manual administration. Furthermore, this can be achieved without any downtime – the software runs 24/7. What if all financial assets could be settled in this way?
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What about real estate? Unlike Bitcoin, bricks and mortar cannot be digitised but if the ownership or title can be digitised, then perhaps the benefits of blockchain technology can be applied to property.
One benefit of a tokenised title is “fractionalisation” – the ability to divide ownership into smaller shares that in turn can be stored on a blockchain. Selling a property into a larger pool of token buyers would reduce the execution risk inherent in relying on a single counterparty. At the same time, people could gain exposure to real estate in bite-sized amounts. Regular savings by individuals into real-estate tokens would reduce the enormity of commitment when it came time to buy a home, for example. Given the value of these savings would rise in sync with the value of property, this would help to keep the ambition of home ownership a reality. Similar to bitcoin, the buying and selling of these real-estate tokens could be undertaken 24/7 using a smartphone.
Blockchain technology could also benefit larger commercial real estate transactions. The partial sale of a commercial investment could unlock funding for an owner without the need to sell the entire asset. Similarly, unencumbered assets could gain leverage by selling tokenised debt into a new source of liquidity.
There are, however, barriers to tokenisation of real estate. The governance of property title does not lend itself well to multiple-party ownership – how are decisions about upgrades taken between so many token holders? Can you tokenise an asset that is already leveraged with multiple charges – who does the creditor make accountable for repayment? Not insurmountable challenges but also not issues that blockchain technology necessarily can solve.
It is more likely that the first step for real estate will be the tokenisation of funds as opposed to individual assets. Blackrock already has long established ETFs backed with real estate assets that it can tokenise easily. Likewise, blockchain adoption in the credit sector could accelerate where financial assets such as real estate bonds and securitisations lend themselves more easily to the digitisation process.
New tax-efficient investment schemes are being considered by the Irish Government given that over €150 billion of funds are sitting in largely dormant savings accounts. Blockchain technology could play a role in unlocking these funds by making it easier for individuals to gain exposure to real estate in smaller, accessible amounts and at an earlier stage in life. Indeed, Ireland enjoys a thriving ecosystem of start-ups that endeavour to unlock the power of blockchain technology. Solutions to the challenges of real estate as a tokenised asset class could be realised on our own shores.
There is still some way to go for this new technology to deliver on its potential. As crypto evangelists often say when assessing the stage bitcoin is at on its journey as investment – “it’s still early”.
