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Real estate tokenization has been a popular topic in the real estate sector. It can potentially be a new medium by which everyday investors can overcome the traditional barriers to enter the real estate market.
In this episode, Jason provides an in-depth overview of how real estate tokenization works.
Jason Chan is an associate in the funds and financial regulatory team in Sidley Austin Hong Kong. He focuses on investment funds formation transactions, including real estate funds and tokenized funds, as well as a diverse range of financial regulatory matters related to funding managers and Fintech companies. Notably, his team worked on Asia’s first tokenized fund.
- What is Real Estate Tokenization?
- What are the pros and cons of tokenization?
- What are the things to be aware of?
As it can be difficult to catch some minor errors, transcripts may contain a few typos or inaccuracies.
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Terminology & Source:
Security Token Offering: While both STOs and ICOs have the same process of making an offer of tokens or cryptocurrencies to the public, STO is more secure because the platforms need to abide by the laws and regulations, guaranteeing security.
Real Estate Security Token Offering: STO in real estate allows investors to have fractional ownership as the security tokens represent the market value of tokenized real estate assets.
Initial Coin Offering: Initial coin offering is the process in which cryptocurrencies are sold for a limited period of time in order to raise funds for a project.
Tokenized funds: Tokenized funds are capital funds that have been tokenized with the use of blockchain technology.
Crowdfunding: Crowdfunding is the way in which a new business or organization reach their target amount by collecting small amounts of money from a large number of individuals in return for a profit or some benefit. It typically takes place on the internet.
Real Estate Crowdfunding: Real Estate Crowdfunding is when real estate firms collect capitals by crowdfunding. It allows investors to become a shareholder of the property by spending only a little amount of money and without going through the hassle of any middleman. For companies, it’s an easy way to raise a handsome capital which would otherwise be difficult to extort.
Real Estate Peer To Peer Lending: Real Estate P2P enables borrowers to borrow money for real estate projects, directly from the investors or lenders without having a bank involved. The investors can own a small share in the invested property and get a good percentage of annual return.
Peer to Peer Lending: Commonly known as P2P, peer to peer lending platforms connect investors to parties who are looking for a loan without going through any traditional financial institution such as a bank or a middleman.
Digital security: Digital security tools let you keep all your online info protected from an intruder. The protected items can be anything starting from your personal info to your banking info, and even the software you use.
Blockchain technology: A blockchain is basically a chain of blocks containing information online. The structure of blockchain technology is designed as such so that the data stored within cannot be tampered with.
Distributed ledger: Unlike blockchain, the records within a distributed ledger do not have to be in blocks or in chains. This database can replicate and share data across the world and without having a central administrator. A blockchain is a form of Distributed Ledger Technology(DLT).
Fractionalization: Fractionalization refers to the concept of having shared ownership of the same asset or property, as well as splitting the benefit as per the ownership amount that comes out of the property.
Smart contract: Smart Contract computer programs ease the process of digitally verifying different bits of a contract. It does not require a middleman and is comparatively inexpensive and time-efficient.
Securities & Futures Commission Of Hong Kong: SFC is responsible for maintaining and securing the future industry by promoting market regulations.
SFC Type 1 License: Dealing in securities. Examples: Trading /broking stock options for clients,
trading bonds for clients, buying / selling mutual funds and unit trusts for clients, placing and underwriting of securities.
Singapore Regulatory Authority MAS: MAS works as Singapore’s central bank as well as its financial regulatory authority.
Real Estate Tokenization Whitepaper:
Alright, let’s get back to the transcript of the show. Enjoy!
Darren: Hey, Jason, how’s it going?
Jason: Good. How are you?
Darren: Good. You know, as I said just now it’s like, very hectic. But you know, this is important because a lot of people, obviously have a lot of question with real estate STO, STO as a whole. And I’m sure someone like you will give people a better idea of what exactly is going on and down with the technicality behind that. So people who doesn’t know who you are, would you mind telling them what you do and the work that you’re working on?
Jason: Yeah, sure. So I’m Jason Chan. I’m an Associate at Sidley Austin, focusing on funds and financial regulatory. So my practice focuses on investments on formation transactions, which includes real estate funds, of course, and tokenized funds, as well as a diverse range of financial regulatory matters related to fund managers and FinTech companies. So my team has worked on Asia’s first tokenized fund and we’ve also recently assisted a client in launching their tokenized quants, hedge fund investing in currency.
Darren: I see. So for people who doesn’t understand about the whole question of ownership segment, right, what does real estate tokenization mean and how is it different than like real estate, crowdfunding or real estate peer to peer?
Jason: Yeah so in short, tokenization generally means moving traditional non-digital securities to a digital form using the blockchain technology and real estate tokenization specifically means that enabling investments in the form of digital tokens backed by real estate in the real world. So, these tokens can represent either equity that economic interest or revenue stream generated from the real estate asset. At the core of tokenization is as I mentioned, blockchain technology which is a type of distributed ledger where you secure identical copies of data across a network of authorized stakeholders, and we can leverage the secure immutable policies of blockchain technology for the tokenization, which can facilitate additional fractional ownership with secure transaction records and also very quick settlement process. So there are a few kind of like advantages of tokenization which includes like fractionalization, which lowers the barriers of entry for investments, operational efficiency, data transparency and most importantly for most of the investor, liquidity. So, I mean, like in terms of difference between real estate crowdfunding and real estate tokenization, while both of them allow for fractionalization of traditionally big ticket investments such as real estate, it lowers the the barriers of entry and also democratize the whole access of real estate asset. So the main differences between the two are basically threefold. So first of all, unlike tokenized real estate, there’s no liquidity in real estate crowdfunding. So investors are often unable to treat these investments on the secondary market and there’s no exit option for investors. So, for tokenized real estate, you can, the investors can often trade these tokens with directly b2b to other investors or they can trade some of them when they are listed in an exchange, they can trade it on an exchange. Second of all, real estate crowdfunding does not provide for the operational efficiency enjoyed by tokenization via the use of blockchain technology. For example, the blockchain technology can allow you to use smart contract for automation for certain compliances and also post issuance process, such as dividend distribution. And thirdly, Real Estate Crowdfunding is usually just simply crowdfunding of equity of that interest in rate estate. But for tokenization, you can basically tokenize anything like it can be other aspects of real estate such as revenue stream and also economic economic interest from real estate assets.
Darren: So it sounds like the real estate security token offering is actually like a 2.0 crowdfunding then, am I correct?
Jason: Yeah, yes, basically.
Darren: Yeah. I see. So what are the key elements to make a real estate tokenization work?
Jason: Yeah, so other than, of course, the real estate asset itself, and also the asset owner. The other elements are all key players in real estate. Tokenization includes, of course, the technology platform provider, which is like the guide who actually knows the blockchain and provides the technology platform so you can move the interests of the real estate onto the blockchain. So that’s, of course the most fundamental thing and of course, I’m a lawyer so I’m going to say a lawyer is a key thing in real estate.
Darren: Just don’t forget that.
Jason: Yeah, yeah. Never forget that. It’s very important to ensure that legal documentation reflects the commercial intention of the investors and also the issuer. Administrators are also very important, they handle all the administrative methods, which are really annoying, such as the registered members subscription and etc. Tech advisor, they provide very good advice as to how to structure it the most tech efficient way, or the security token issuance. And finally, of course, because it’s dealing with real estate, we need a real estate valuer. Who can value the underlying real estate asset for the issuer.
Darren: Well, you know, I’ve been hearing about real estate tokenization for many, many years, but it doesn’t seem like the industry has much, you know, cases or things that are going on. What’s the reason behind that? Or I’m sleeping under a rock, like, I just want to know what’s going on there.
Jason: Yeah, you’re right. You’re right. So there hasn’t been a whole lot of real estate tokenization. There are a few outside of Asia but those are mostly very small projects and also usually for very private investors. So, I think the main two main reasons for real estate tokenization not being as popular as it should be is first of all, the incomplete ecosystem and infrastructure. So, generally speaking the tokenization ecosystem and infrastructure globally I think is not fully developed yet. This may be due to just very unclear restrictive laws and regulations, it can be a lack of expertise or talent or simply that there is insufficient amount of players in the market due to a lack of interest or interest in the new industry because the whole blockchain and tokenization industry is relatively new. So, a lot of things are still being developed. Second of all, I think that there’s currently a lack of investor or financial industry players interested and confident. So, larger traditional institutional investors, and financial industry players, I’m not exactly comfortable with the concept of security tokens, nor blockchain so that they’re still very skeptical about anything that’s blockchain, anything that’s related to cryptocurrency. However, during these months, especially, I think they are absurd trying to offset the market and there has been more interest from in-q incumbent financial industry players, more high net worth individuals, family offices, and also tech companies who are getting into the scene.
Darren: I see, yeah, I was gonna ask you too because we’re like recovering from COVID and the recession. Does Covid help or worsen the tokenization potential?
Jason: Yeah, I think it actually does help speed up the whole interest in adaptation of real estate tokenization. So I think there are two reasons. So first of all, because economic activities are slowing down these days, asset managers and investors have more time to explore new ways they can manage their investments, with more flexibility. And one of the options out there being tokenization. So everyone kind of like, has more time to actually not do the deals and actually look at new ways of doing deals. And more importantly, I think during the economic downturn, many investors are looking for exit option for the investments, but they’re not able to do so at the moment because of the illiquid nature of their of certain investments such as, like, if they invest in private equity fund real estate or real estate funds they have a long lockup period or they can only usually withdraw when it’s the end of the term of the fund. So now they are looking at ways where they’re resisting ways that they can easily exit and build the interest, the investment in the future. And organization is definitely one of the more attractive options available.
Darren: I see. So going back to one of the questions I just asked you, and you kind of covered it, right. You know, how you talk about, like, a lot of investors are not looking at it yet, and a lot of players are missing. So it’s not only today, it’s like a three, four things are missing. So in your point of view, how is the ecosystem of tokenization at the moment? What else is missing? And what kind of parties are involved in order to make everything happen?
Jason: Yeah, so I think for the time being, like, as I mentioned, the ecosystem infrastructure of real estate tokenization, it’s really at its early stage and is far from complete or mature like a traditional counter, like financial counterparts. For example, in Hong Kong, there’s yet to be a regulator or licensed asset trading platform approved by the Hong Kong securities regulator, so the SMC. And in Singapore, the regulator approves traditional trading platforms backed by the Singaporean government. But generally there’s a lack of interest in security token issuance. So, I mean, like in different jurisdiction, they do different things. And I think, also, like many market players are still warming up to this relatively new technology and way or fundraising. In terms of the parties getting involved in order to list the project, I mean, in addition to that, the few that I mentioned just now like the technology platform lawyer, administrator, tech advisor, and real estate, valuer, I think, of course, the most important thing is the investor. So the investor needs to be interested in order for people to stop thinking about issuance of real estate tokens, and that’s the main driver for I mean, like money is the main driver for most businesses. So, yeah, I think that’s still kind of missing at the moment.
Darren: I see. So all of that right, obviously, followup this debt, you know, where are we at in Hong Kong with the RESTO, you know, there is a security token offering. And then, Sharif, is there any projects going on? Or should we see any product listings coming up soon?
Jason: Yeah, so in Hong Kong, so I’ll cover basically Hong Kong and Singapore because we recently issued a report covering those two jurisdictions. So in Hong Kong, we are seeing that tokenization and virtual asset ecosystem are trying to get more established anyway, and more market players are following us in this space. So in terms of the regulatory environment, it’s getting clearer because the SFC is giving quite a bit of guidance generally, and they have been granting licenses to my managers who manages cryptocurrency and security tokens, so we anticipate that the SFC will soon, sometime this year grab their first virtual asset trading platform license across which hopefully, fingers crossed, hopefully make the ecosystem more complete and more welcoming to the asset owners looking to tokenization because ultimately, the promise of tokenization is increasing liquidity, right. So then no trading platform doing ads, investors won’t be comfortable enough to get into the tokenization market. And if there’s no investors, as I mentioned, there’ll be no asset owner who wants to tokenize the asset. So ultimately, if the infrastructure is built in Hong Kong, that there is a trading platform, it will help a lot. And in Singapore, we’re seeing that as I mentioned, we think that the Singapore Regulatory Authority MAS has already approved two government backed security token exchanges. And so the network is, in a sense more mature than that of Hong Kong. And that said, we’re actually seeing less security token offering in Singapore at this age when compared to Hong Kong. It’s kind of weird. So I’m guessing that perhaps market players in the Southeast Asian countries are still warming up to this new way of raising. That said, because the government is trying to push for Singapore to be the Asian FinTech hub. I think we will definitely see more tokenization projects coming in the next 12 to 18 months. And in terms of opportunities, I think a lot of traditional financial institutions are still looking into tokenization but not really fully dived into this market. So we’re seeing more newer and smaller market players who will take this opportunity to have trial basis whole industry and gain a first mover advantage over the incumbent bigger players in the financial and real estate market. For example, like there are usually smaller projects, which they serve as test case for them to show that investors that oh actually it works, and also for them to kind of figure out and smooth out all the operational and practical problems before they go to the bigger market and tell all their existing investors, “Hey, like we have this tokenization project, which is huge and you should be part of it.” So, I think this will take some time. And also like all these players will have to give a bit more investment into these kind of projects before they can actually grow the market and also it will be a very steep learning process for all the markets.
Darren: I see, Well for Denzity, right, we hope that people are participating in more real estate investing. So when you talk about this whole thing, in my head I was like, “I really wish this happened because it takes only one or two people like the lawyers obviously and all the different regulatory, when combined together to make this happen.” It’s like a community though, you know, you have to push forward. So, with that, right, what are some things that an investor should keep in mind when it comes to really tokenization?
Jason: Yeah, so as a lawyer, I’m going to talk about regulations, right. So from a regulatory point of view, definitely, globally speaking, like regulatory regimes surrounding tokenization it’s very difficult now, difficult to navigate, especially for newer players in the financial industry, if they are from a technology background. So for those who are in the finance industry, that are usually more used to being regulated by securities regulators, but for tech industry players, they usually come free and do whatever they want. So if they want to do it a proper way and they want to get on board, some bigger financial institutions on board, they will have to navigate the securities related regulations before they actually kick start a project. So please seek proper legal and regulatory advice as a lawyer. Jokes aside, yes, that’s that’s actually very important because we do see securities regulators take enforcement actions against non compliant projects, especially if they’re very public. So on an operational level because we have assisted clients and doing that tokenization project recently. So from experience, because blockchain and digital assets are newly introduced in this world of asset management, there’s no like established standard or modus operandi as to the responsibilities and industry standards for party service providers, such as administrator, custodian, technology service providers. So there are situations from our experience where they’re engaged and only a very late stage of the tokenization and the asset owner or the Manage fund manager finds out in the very last minute that the service provider is actually not able to accommodate any proposed arrangements. So we have to change all the documentation, we have to figure out all the mechanism so there’s no it’s no standards, so they don’t know what standard to meet in a sense. So I mean, it’s logistically, from an operational perspective, I think when doing a tokenization project, these service providers need to be engaged at a very, very early stage of tokenization and the documenting.
Darren: I see. So like, for the past two years, right, are there any type of cases like in 2019, 2020 that are successful?
Jason: Yeah. So, we are globally speaking we are lucky, we see a lot of success case organization generally. And, it covers all types of assets, any types of asset you think you can think of, that are traditionally illiquid or big ticket So, such as art and of course real estate, private equity and other exotic asset classes or commodities. So in addition to tokenization of a single piece of asset for example, a single piece of land or single piece of art, more recently, we are actually seeing more interest in tokenization of funds and state funds so we have recently helped our client launch a tokenized actively manage quant fund, which features cryptocurrency as one of the asset classes. So, if you want more details definitely contact us and, and let us know if you’re interested. So, I mean in terms of these project size of these success cases, we know that there are usually at this stage relatively small. For Example, it’s still kind of like one asset, a small piece of asset and with very few investors and generally just a generally smaller scale fundraise. Projects are usually done by the manager or the asset owner as a proof of contact or communicate. So for them to kind of figure out all the operational and logistical aspects before they go on to do bigger projects.
Darren: So what type of landlords or estate owners should or should not participate in real estate tokenization.
Jason: Okay, to me, all asset owners should at least consider tokenization because we do anticipate that it will become increasingly popular. As I mentioned, there’s a lot of benefits to tokenization and investors are looking into it. So they will eventually, some of them will eventually demand tokenization as part of their term for investments. So like, if you are a real estate owner, at least kind of know what it is and think and put it at the back of your mind. Because in case someone asks you, oh, can we tokenize this because I want liquidity for my investment and in the future, at least you know what it is and you can talk to the relevant people, for example, my book are also the liquify. And with that said I mean, like the asset owners should consider how they can structure that tokenization project. So whether it’s a single project single asset fund, a multi projects fund blind pool or do they only tokenize their equity or beneficial ownership or economic interests are just a revenue stream. So things like what kind of interests of the real estate asset they should tokenize and when doing this, they have to bear in mind of their specific business operation and management strategy. So, if you don’t want any management decision, maybe when tokenizing you should put some of the management account faulting into the tokens that you issue. If you want to retain the management then maybe you should only tokenize the economic interest. If you want to still retain the ownership then you should only perhaps tokenize the revenue stream or tokenized asset, as opposed to the equity or the economic interest.
Darren: That’s cool. This is a lot of things to digest. And, you know, I’m still learning about it. So for firms that want to participate in real estate tokenization what do they need to have?
Jason: Yep. So I mean, as I mentioned just now for folks who want to participate in the real estate tokenization as these tokens are usually considered a security in most jurisdictions, at least most of the popular jurisdictions, they will have to comply with the local securities laws and regulations. And perhaps in those jurisdictions, they might have this virtual assets specific rules and regulations. So, for example, in Hong Kong, if the Fed wants to market or distribute a security tokens, it will have to obtain a type 1 license with the SFC or find a type 1 license who’s registered with the SFC as well as notify the SFC. As well as the licensee, they have to notify the SFC office plan to distribute security token. And for example, if you want to become a virtual asset trading platform trading security tokens of real estate, then the SFC has also issued licensing terms and conditions for these operators locked back in last year, which sets out some eligibility and regulatory requirements for security token exchange to operate in Hong Kong all for Hong Kong person. So, and also for Asset Management, asset managers who manages funds with exposure to virtual assets, depending on the level of their exposure to these virtual assets, they might also have to notify the SFC of such investments and comply with the relevant virtual asset managers specific terms and conditions. So basically, you have as a lawyer we always have to remind you to be compliant and think about the regulatory issues before you go on to pursue a project.
Darren: No, like, I feel like for the past, like 20, I don’t know how long we’ve done maybe 20 minutes. It’s like this one lecture in university, but it is so much more fun and engaging and there’s a lot that’s interesting. Oh, yes, I feel like that and obviously that’s what we hope with this whole Denzity insights channel. It’s that people can have more engaging learning same time is that you’re someone who has the credentials to do that. You know, you’re not just someone on the internet. So on a personal note, right, it’s something that I’m just curious to know more about and how you think about it, right? How do you feel about learning this whole industry? Because I don’t know what you have done, what kind of like field you’re in or what kind of sector you were in before. But how do you feel after learning all that and how do you feel about the future of this whole, you know, real estate STO potential?
Jason: Yeah, so I think because the benefits are quite obvious to many investors, I think many larger players are really looking into it and some of them are asking us about the regulatory framework, as well as the commercial aspects of these real estate STO so I think they’re really thinking about it when they are doing future projects. Maybe they won’t really deep dive at this very moment considering all the factors and economic downturn but in the future, they would definitely get into it and I see like, generally speaking the blockchain industry, many of the larger financial players are getting into the game for example, modality and also like northern trust, they are getting into the virtual asset custody business. So I mean, like they’re getting serious about it and we do see a lot of institutional investors looking at virtual assets as a viable and also not reliable but one of the future asset classes that they look to have exposure in so I think it’s a good time to start learning about real estate tokenization because it will become popular I think and I do think the ecosystem will be mature enough in the future for this serious kind of investment by institutional and financial investor.
Darren: That’s kind of cool. I mean, again, hoping for ASAP. So, what kind of takeaway do you want the audience to have with this video?
Jason: Yeah, so I think five main takeaways is a bit much but it’s fine. So first of all, advantages of tokenization, which includes lowering variable acts of entry for investments, operational efficiency, data transparency and most importantly liquidity, which is very important to investors. Second point the ecosystem and infrastructure of real estate organization is still at its very early age. And as it has to be mature enough for serious industry players to join. Third point, marketing players are warming up to this new way of amazing and the regulatory environment is getting clearer and investors are considering tokenization as an attractive potential exit option. Fourth point being, as traditional financial institution are not yet dived into this market, new and smaller market players should take into account this opportunity to trailblaze the industry and gain the best mover advantage. And lastly, it’s a sales pitch. So we had one of the agents first tokenized fund and we have recently assisted a client in launching a tokenized quant fund investing in cryptocurrency. So find us if you have any questions about tokenization.
Darren: I mean, everything falls under that one takeaway. But then how do people find you, what some ways that you would suggest people to reach out to you and learn more about it?
Jason: Yep. So if you’re interested in knowing more about real estate tokenization, tokenization generally, or just want to see how we can help with your tokenization project, you can reach out to me by email at Jason.Chen@sidley.com. You can also read about tokenized Real Estate tokenization in a report that we have co authored with Liquefy, Colliers, and KPMG. And I think we can provide you with a link somewhere afterwards.
Darren: Yeah, that’s cool. That’s good. And then I think that that’s something that like even this whole interview, there’s a lot things I didn’t digest, and then I just want to say thanks for your time because you know, it is something that I am really looking forward to and it’s good to have an update on that. So someone with a professional background like yourself, just to know more about what’s going on, it’s an exciting time it’s still wild west, you know? So kind of cool.
Jason: Yeah, yeah. Anyway, so inviting me to this.
Darren: I just want the audience to know more about what’s going on out there. And yeah, so let’s try again next time and again, thanks a lot. And then maybe we can do a longer form next time with updates. That’d be great.
Jason: Yeah, sure. Sure.Thank you very much.
Darren: Thank you. Have a good one then.
Jason: Thank you. Yeah, you too.
Darren: Bye bye.
Jason：是的，當然。所以我叫Jason Chan。我是Sidley Austin的助理，專注於基金和金融監管。囙此，我的業務集中在對資訊交易的投資上，其中當然包括房地產基金和標記化基金，以及與基金經理和金融科技公司相關的各種金融監管事項。囙此，我的團隊一直致力於亞洲第一隻代幣化基金的開發，最近我們還協助一比特客戶推出了他們的標記化基金，即對沖基金投資於貨幣。
Darren ：不，好像，我覺得在過去，大概20分鐘，我不知道我們做了多長時間，也許20分鐘。就像大學裏的這節課，但它更有趣，更吸引人，還有很多有趣的東西。哦，是的，我有這種感覺，很明顯這就是我們希望整個Denzity insights頻道能做到的。這是因為人們可以有更具吸引力的學習同時，你是一個有資格這樣做的人。你知道，你不僅僅是網上的人。所以就我個人而言，對吧，我只是好奇地想知道更多，你是怎麼想的，對吧？你對學習整個行業有何感想？因為我不知道你做過什麼，你在什麼樣的領域，或者你以前在什麼行業。但是在瞭解了所有這些之後，你有什麼感覺？你對整個房地產市場的未來有什麼看法？