Initially, blockchain technologies were used predominantly for crypto currencies. Thereafter, fundings for start-ups by way of initial coin offerings played an important role. The next step will be the tokenization of assets: experts like Axel von Goldbeck are already working on crypto transactions in the fields of real estates. A lawyer/partner at DWF Germany specialized in crypto investments, he comments on market developments and perspectives.
Axel, is there already a market for crypto investments in real estates?
von Goldbeck: Measured by the number and volume of investments in asset tokenizers as well as demand for token and/or token offerings the answer is yes. After start-up companies like Brickblock have broken the grounds for asset tokens we are increasingly contacted by asset managers who are interest in exploring the added value of blockchain-based fund raising compared to conventional ways. Asset management know-how and tech know-how are forming alliances benefitting the whole market.
What drives crypto investments in real estates?
von Goldbeck: Firstly, the interest if crypto owners to diversify their risks and secondly to support crypto-currencies with a real asset underlying. Moreover, the curiosity of asset managers to explore the added value of blockchain-based solutions and furthermore to address new investor groups – in terms of geographical scope and behaviour.
To what extent do real estate tokens improve efficiency and are beneficial?
von Goldbeck: Real estate as well as other asset tokens are as good as other indirect real estate investments but are much easier to handle (in terms of offering and trading) and have a global reach as far as retail investors are concerned. These are the predominant features. A less dominant but still important factor may be that asset tokens are cooler than ordinary real estate investments.
How can a real estate token be structured legally?
von Goldbeck: A base structure would simply reflect existing finance instruments, i.e. equity, debt or mezzanine offerings and financing structures. This may not be appealing for many outside the crypto-community, but there is more to come as tokens can be designed a lot more flexibly that conventional finance instruments. In particular, they can be used for community building and may include other than only financial benefits.
But in many jurisdictions the transfer of real estates is quite formal and requires a notarial deed. How can this issue be handled?
von Goldbeck: A crypto investment – at least in German property – will always be an indirect real estate investment that. Unfortunately, offering all too often imply that investors will get a title in a certain property which is somewhat misleading – to put it politely. In fact, most investors want to benefit from the economic value and cash flow property generates. A legal title is neither necessary nor desirable for investors as a lot of obligations and responsibility goes with it. So, there is nothing bad about indirect investments. However, communication should made that clear.
Which regulatory hurdles are currently of relevance related to real estate tokens and how can this be solved?
von Goldbeck: Real estate tokens that confer a claim to financial benefits – what they usually do – are classified as securities in most jurisdictions. As the regulatory framework for offering and dealing with securities is pretty tight, real estate/asset tokens offerings have to deal with a lot more compliance issues than payment or utility tokens. In particular license and prospectus requirements need to be checked. As far as the former is concerned there are almost no workarounds except locating to the one of the very few places where no such requirements exists – entailing scores of other problems. As far as the latter is concerned most offering are making use of exemption from the obligation to publish a formal and approved prospectus – which does not mean, however, that there are no information obligations anymore.
Which legislative changes should be made to let crypto investments in real estate become an attractive asset class?
von Goldbeck: The paper form requirement for securities should be given up immediately, all form requirements for transaction should be reviewed. We know that the federal government is preparing a legislative review of technological neutrality of German laws to which we will contribute.