An
increasing number of countries have begun the process of implementing
functional and legal frameworks to regulate blockchain-recorded tokens
over the past several months, which has led to increasing exploration of
these technologies across many investment sectors.
Further, the use of distributed ledger technology (DLT)
is a powerful disruptor at the transactional level, where significant
disintermediation is occurring — especially with one of the most popular
alternative investments: real estate.
Much of the recent
regulation — or steps toward regulation — address volatility and risk
concerns related to both initial coin offerings (collectively, ICOs) and security token offerings (STOs).
For example, recent regulatory movements include:
In July 2018, Malta passed into law
the world's first legislative framework for blockchain and DLT with the
purpose of regulating ICOs and STOs, including a benchmark regulatory
platform and process.
In December 2018, the Council of the European Union published the G-20 declaration titled “Building Consensus for Fair and Sustainable Development,” summarizing the discussions at the 13th G-20 meeting in Buenos Aires, Argentina.
Following the G-20 declaration, seven European Union countries — the “Mediterranean Seven"
— signed a declaration agreeing to cooperate on blockchain and DLT
technologies. Malta took the initiative to launch the declaration, the
other signatories included Italy, Spain, France, Portugal, Cyprus and
Greece. The agreement binds the signatory countries to promote the
technology and work together in the blockchain sphere.
Switzerland also provided a dedicated framework for cryptocurrency, as did the Isle of Man.
The United States Securities and Exchange Commission (SEC)
continued to treat ICOs as securities until September 2018, when
clarification was sought from the SEC Chairman in a formal letter,
following a meeting in Washington attended by representatives from Wall
Street, venture capitalists, cryptocurrency firms and the U.S. Chamber
of Commerce. A letter was prepared by the group and
signed by more than a dozen members of Congress for the SEC chairman,
ultimately inspiring four crypto-friendly bills to go to Congress in
early 2019.
South Korea and Brazil banned investment in ICOs in 2018.
As
many groups are seeking to fine-tune and standardize definitions of the
different types of tokens, much of this regulation recognizes that STOs
— which, unlike most ICOs, are backed by physical assets — could be the
solution to security and fraud concerns surrounding ICOs and other
types of crypto tokens.
Additionally, STO raises had a 95% completion rate last year. Ultimately, this success and validation has led to broad acceptance of STOs across several sectors, including real estate.
Fractional real estate
The
biggest game changer will likely be found in unlocking the liquidity of
smaller investors through democratizing access, thanks to fractional
real estate (FRE) opportunities.
Since this class of investment
was previously only accessible to high-net-worth investors, real estate
investment trusts (REITs), opportunity funds, investment vehicles
managed by major banks, or institutional investors, the tokenization of
investment-grade assets into FRE significantly lowers the barrier of
entry, priced at single token value with no traditional minimum
investment limits or lock-in periods — creating a simpler and more
secure opportunity for investors to buy in to.
Data
Another
way that the real estate investment and transaction landscape is
changing due to blockchain technologies is the use of DLT to create
public, state and federal government blockchains for all types of real
estate-related databases, which increases accessibility, reduces rework,
simplifies transactional procedures and reduces time frames.
Universal regulatory acceptance
While
there is still a long way to go when it comes to universal regulatory
acceptance — for example, China, India and several other countries have
banned STOs outright in recent years — crypto tokens and DLT are
changing investment processes in major real estate markets around the
world.
The expansion of DLT usage — in title verification,
valuation, diligence, insurance payment and settlement, smart contacts,
construction monitoring and material verification — in conjunction with
an increase in FRE STO opportunities, has a strong growth outlook for
2019.
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