Real estate tokenisation, a fund manager’s perspective

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Interview with Mathieu Saint-Cyr

For this series of interviews, five experts propose to demystify tokenisation 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 second interview, Mathieu Saint-Cyr, Head of Asset Management and Fintech Solutions at Geneva Management Group, brings us his perspective on real estate tokenisation as a fund manager. In addition to his role at GMG, Mathieu is Chairman of the Board of Wecan Tokenize, an innovative digital asset platform, and co-founder of the Geneva Fintech Association.

He was previously Head of Trading at MKS, a leading precious metals trading and refining company. Prior to this position, Mathieu headed BNP Paribas’ global gold derivatives trading business. He holds two MSc degrees in fundamental and financial mathematics.

How do you think technology is improving the financial sector?

I think technology is an integral part of the financial sector, whether it’s in the management of clients with onboarding, in the investments they make, but also in the controls that need to be put in place around those investments. Technology, and in particular the technology around tokenisation, responds to these three phases of investment management.

At the level of onboarding, we create digital profiles for clients, which makes these processes much easier, faster and more efficient, and therefore more pleasant for the client. At the investment level, this allows the client or investor to better understand his investments, to better follow them and to monitor them in real time. But also, if necessary, to create a certain liquidity, i.e. to be able to resell shares in assets that they have bought.

And finally, in terms of control, which is an extremely important point in the financial system in general. And of course the standardisation of control methods via technology. For example, in the context of tokenisation, this makes it possible to have a circulation of assets and investments that is regulated.

What advice would you give to fund managers who want to offer tokenised assets to their clients?

Perhaps two pieces of advice. The first is to get closer to players who have been active in tokenisation, players who have a track record, who have proved that they have mastered this technology and that they can also deliver concrete and usable solutions for investors and for the people who work with these investors. It is therefore very important to have a regulated framework, to understand the regulations in force in the country in which the manager is located, but also the country in which the investors are located, which are not necessarily the same. The rules differ from country to country and it is very important to understand this in order to propose a framework that protects the investor and respects the legislation in force in the country where one operates.

What is the investment process?

Ultimately the token and the way it is offered, particularly in the context of Wecan Tokenize, is nothing more than a digital representation of a title to an asset. It is a way to access an investment. You have to make sure that this means is equivalent to a traditional title deed, for example a paper title deed such as a contract that you have signed at the notary’s office.

Once you have that digital title, the processes are the classic ones which are onboarding as a customer, that is KYC – saying who you are, showing proof of identity – creating the investment via payment and buying its tokens, and then you are in a financial market in the same way as you would be if you were buying shares, fund units, or other financial instruments and you can trade those financial securities in a completely equivalent way.

What is the legal framework for this financial structuring?

The legal framework is a financial legal framework in the broad sense, i.e. we have to comply with the regulations in the country where we are located. In Switzerland it is the regulation as proposed by the FINMA, if you are in Luxembourg it is the regulation as issued by the CSSF. It’s very important to understand which part of the current regulation you can already use, i.e. the transfer of securities, the transfer of financial assets and which part of the regulation is specific to the use of digital securities or tokens.

As far as Switzerland is concerned, I think we have a great advantage because the regulator made its decision very early on, several years ago now, and in any case well ahead of the regulators in European countries or other countries in the world. So the framework was proposed in two stages. Firstly, a framework that we call the “sandbox”, i.e. we are trying to set up the first transactions and the first projects, and then the law that is being implemented, and in particular this year that is being implemented, as for the rest of the financial assets, and which specifies the cases of application and the cases of use of these tokens.

What are the risks of investing in real estate via tokenisation?

I think it is very important to understand that tokenisation is only a means of accessing a financial product, which in this case is a real estate asset, but one could very well imagine tokenising a share of a fund – which has already been done – or other types of financial assets such as shares or bonds.

The risks inherent in investing in tokenisation are ultimately the same as the risks of investing in the underlying or final asset in which one invests. One should not think that since one is tokenising there is no longer any real estate risk. The first risk is the real estate risk when you invest in real estate. In addition, there are certain risks, in particular a regulatory risk: you have to make sure that the token you buy, and if necessary resell, is issued by an issuer that is regulated in the country in which you are located and that is regulated in the country in which the client is located. So there is a slightly increased regulatory risk.

And finally, there is an exchange risk that is different from that for traditional financial securities, since tokens are generally exchanged on marketplaces that are perhaps less regulated, or in any case with players who have less experience. This is why we strongly advocate the use of tokenisation in the context of partnerships with entities that are very well known. For example, in Switzerland we have an initiative with the SDX exchange, which is the digital exchange of the SIX exchange, which is the national exchange, and in this framework this risk is greatly reduced.

What have been the challenges and obstacles to using a cutting-edge technology?

Finally, I think that tokenisation is no longer as avant-garde as it was in the past. It is becoming much more mainstream and we are seeing in particular that blockchain technology, which has been much talked about through crypto-currencies over the last few years, is finally spreading to a much broader set of applications. Today, via our sister company, Wecan Comply, we have succeeded in creating a lot of interest in the technology on the part of leading financial players, be they banks, external asset managers or private managers, to work together on a common platform based on blockchain technology.

Tokenisation uses the same technology and is based on the exchange of property titles of assets that already exist in the market and that can be freely exchanged, in this case either real estate, real estate shares or real estate fund shares.

So the challenges we face are ultimately challenges of adoption, of use by the client or the end investor of the technology, and regulatory challenges with regulations that are being put in place very quickly, particularly in Switzerland, but which have not existed for 10, 20, 30 or 50 years. So there is necessarily work to be done to understand the nuances of using the regulations for the exchange of tokens. And finally I would say that there is also a challenge in terms of reputation and education.

It’s very important to understand that someone who invests in a real estate token, again that is, they own a digital title to a real estate asset, is not at all an investor who invests in, say, crypto-currencies or Bitcoin. Making the nuance and differentiation between these different assets in the blockchain sphere is also a challenge and this is where players like Wecan Tokenize or Wecan Comply have a very important role to play, in educating, simplifying and explaining the different ways to use the technology.

How do you see investment via tokenisation in the coming years?

My view, and the view of Wecan Tokenize, and by extension our sister company Wecan Comply, and all the discussions we’ve had with financial players on this issue, is that the share of tokenisation in the exchange of property titles, particularly in real estate, is going to grow drastically over the next few years. We’ve seen a few pilot projects over the last two or three years and then larger projects over the last few months.

The Wecan Tokenize project, for example, has succeeded in raising almost fifteen million dollars of investment in tokens for real estate projects. We are now seeing a much more widespread adoption by institutional clients, whether they are very large asset managers, which are our clients, or banks, or smaller companies, which are also trying to benefit from the advantages of this technology to offer more services to their clients.

All of these players are increasingly using this technology to bring in a wider range of investors, ways of investing smaller amounts of money in projects that until now have generally been reserved for professional or institutional investors.

Where do the leaders in real estate development and asset management stand?

I think that in this sector of activity the leading companies, or at least the pioneering companies that are keen to develop the use of technology, have moved from a phase of discovery, understanding and study of the issue to a phase of setting up many pilot projects. The latter have very practical and pragmatic aims for clients who already have problems they are trying to solve with tokenisation, but also with other methodologies, securitisation, exchange of fund shares, funds that are not necessarily listed, between entities that generally do not exchange their shares.

I am thinking for example of foundations on the Swiss market. So there is a whole range of projects, which are very practical projects where tokenisation is used, perhaps not yet for the greatest number, perhaps not yet for investment amounts of a few euros, but in any case we are a long way from the projects of a few years ago when we were really limited to “proof of concept” without really practical applications. Today I would say that it is very practical, very pragmatic and increasingly widespread, especially among players with very diverse profiles.

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