Editorial Staff, 19 March 2021
By 2025, 10% of the world’s Gross Domestic Product (GDP) – or $24 trillion – will be stored and traded using blockchain technology, according to the World Economic Forum. This is the so-called “tokenization” process.
For this series of interviews, five experts propose to demystify tokenization in their field of expertise: from the point of view of the real estate developer, the independent manager, the bank and the auditor.
For this first interview, Vincent Pignon, a blockchain expert, explains the main principles of tokenization applied to real estate securitization. Founder and CEO of Wecan Group, which launched the Wecan Tokenize solution, Vincent is an active entrepreneur in the field of finance and distributed ledger technologies (Blockchain). Executive director of the blockchain program at CREA and previously blockchain advisor at the State of Geneva, Vincent holds a PhD from Mines Paris Tech.
How is digital impacting the way we invest in real estate?
Digital has started to impact the way to invest mainly in the first step which is onboarding. Investors now have the opportunity to make an indirect investment in real estate, with a process that is 100% digital. This started with crowdfunding, in the years 2010-2015 mainly, in different forms, both in equity and in debt. We then saw an evolution to give access to several real estate projects and the secondary market with tokenization. One of the challenges of tokenization is to bring liquidity to indirect real estate investment through platforms like crowdfunding.
What are the advantages of tokenization compared to real estate securitization?
The main benefit of tokenization is to reduce the transaction costs of an indirect real estate investment by having a digital representation of the real estate asset or the vehicle that invests in the real estate asset. The vehicle can be a fund share that will be represented by a digital token that can be purchased by investors on the primary market. It can then be exchanged, peer to peer, without necessarily going through a market place or OTC.
This real estate security will be able to be split in a much finer way than a fund share, reserved for qualified investors. This will open up the prospect of a retail investment in this type of asset, but will also make it possible to create a portfolio of real estate assets with shares in an apartment, a house or a building in different cities around the world, which can be arbitrated and resold much more easily.
What is the state of the tokenization market in Switzerland?
In Switzerland, the market is still in its infancy. The first initiatives date back to two years ago. FINMA, the financial regulator, took a position quite early on the different categories of tokens or, more precisely, of “security tokens”, which can be used for tokenization.
There are several initiatives on the real estate theme, whether in Zurich or in other European cities, but always starting from Swiss vehicles or platforms. This is a market that is developing.
Today, there are two problems to ensure that it develops more rapidly: firstly, to be able to secure or “custodize” the digital tokens, since these are securities that need to be stored and secured in the best possible way – and today there is not yet the infrastructure, particularly in the banking sector, to be able to do this – and secondly, to be able to have a liquid, lively secondary market, on which investors come to exchange securities.
These are the issues on which the Swiss stock exchange is working. Some players, such as digital asset banks, were created in 2020, notably Sygnum and Seba, and other players are emerging in this field. There will most likely be an acceleration of the tokenization market in Switzerland from 2021 to 2025.
More concretely, how does tokenization work? Who is it aimed at?
Tokenization works in different ways depending on the vehicle and the underlying objective. The simplest form is to use a traditional process, i.e. securitization, and on this securitization to digitalize only the securities. Instead of doing “paper-stone”, as we have experienced in recent years with funds, we will do “token-stone”. We represent the stone by a digital token and it is this digital token that we will then distribute to investors, whether they are institutional, qualified or retail. This is the simplest way to proceed: we keep the initial value chain and we make a digital representation of the security that has been created. This is as valid for equity as for debt.
Can you give us a concrete example of tokenization?
The first example is Capelli, a real estate developer based in Switzerland with a company listed on Euronext. Capelli has tokenized bonds on its real estate development operations. In this case we have a bond that has been tokenized, distributed on which we have an annual dividend payment. The operation was done through a Luxembourg vehicle and it is this vehicle that was tokenized. The second example, Geneva Management Group, is more or less similar. These are fund units that have been tokenized, distributed, purchased by qualified investors only and for which there is an OTC secondary market.
And what are the risks associated with the tokenization of assets?
Today, the main risks are less regulatory than technological. From a regulatory point of view, the main aspects have been addressed, both by the financial regulator, FINMA, but also by the Swiss Confederation. We have a legal and regulatory framework that is adequate. The main issues now, which will also be addressed in this series of interviews, will be the tax aspects, in particular how an investor will consider the taxation of these digital tokens and the second is the technological security of holding these assets, with the risk of losing them or potentially having a trusted third party who will custodian them, store them on behalf of investors. This could be a bank or a securities trader, or potentially an external manager who will be able to store these “security tokens” on behalf of its clients.
How do you see the evolution of tokenization and the use of blockchain for investments?
It is obvious today that all assets will be tokenized, whether they are banked or unbanked assets. So real estate will potentially be even more so than banked assets. There is going to be a market challenge for all the players, especially the banks, to be able to include this type of asset in their AUM and also to offer advice and storage. This is an industry issue that goes beyond Switzerland and is most likely global. It will also most certainly change the infrastructure for processing digital assets, whatever they are, at the level of the exchanges, but also of the banks and of the various players in the industry, such as brokers, dealers, operators, fund structurers and those managing these funds. In a few years this will become mainstream, it’s something that I think is inevitable for the industry.
Finally, what advice would you give to people who want to get into real estate tokenization?
This is an opportune time to get into real estate tokenization. There is a lot to create, including standards as well as discussions with the various stakeholders such as the regulator, market operators, banks and players who will play the role of broker and dealer on the liquidity part of the market.
The challenge is really to consider that we are still at the very beginning of this fundamental evolution but that it is inevitable. We need to be able to work with players who have already mastered these operations to a greater or lesser extent, so as not to recreate the wheel, but rather to try to build on something that has already been done.
The motivations of the players who are involved in tokenization are rather to be able to improve the procedure, to reduce the time and costs of transactions in order to optimize the whole process.