Real Estate Tokenization

Tokenization of real estate is the new hype and a thriving business model with its lucrative opportunities for both the issuers and investors.

Tokenization provides the real estate industry with the fractionality, liquidity, accessibility and global scalability to an extent that could have never been achieved before.

Real estate tokenization involves representing physical properties as digital tokens on a blockchain network. Generally, each token represents a fraction of the property's value.

Projects can use various methods to tokenize real assets, such as establishing a company where tokens serve as digital representations of ownership or "para-ownership" interests on the immovable property.

Projects may also choose to issue tokens that represent ownership on the fractions of the title deed registry certificates (tokenized valuable written instrument), which proves the ownership for the real estate.

As another option, projects may issue tokens representing rights and interests on the business enterprise owning the pieces of properties. Projects may choose to create a single token or multiple tokens representing the business holding the property or properties or an entire property or to divide it into fractional tokens.

The project may include additional features and rights associated with the tokens, such as profit-sharing, voting rights, lease revenues or access to property use. These initiatives may enable the projects to provide token holders with access to revenues generated through the sale or lease proceeds of real estate. Also, with the right integrations, smart contracts may automate tasks such as rent collection, property maintenance, and distribution of rental income.

As a keen eye would immediately recognize, such tokens may easily fall within the scope of regulations as crypto asset securities, depending on the model they chose.

Legal Aspects

The projects may eliminate the geographical barriers by utilizing blockchain technology and enable individuals from around the world to participate in real estate opportunities. While determining the business methods, projects must diligently consider the legal framework of the country in which they intend to issue the tokens.

Different countries may impose distinct requirements on token issuance, including licensing obligations and other regulatory requirements such as data management and protection, know your customer (KYC) and anti-money laundering (AML) reporting regulations. For example, real estate tokens issued in the European Union could be subject to the obligations and requirements outlined in the Markets in Crypto-Assets (MiCA) framework. Certain jurisdictions may categorize issued tokens as securities or financial instruments, subjecting them to securities regulations. Then, projects have the option to benefit from exemptions, such as Regulation D in the United States.

Apart from that, the country may have additional regulations applicable to the project regarding property rights, advertising standards, or data protection rules. Projects may be subject to regulations even though they do not have a physical presence in the country. By carefully assessing the legal landscape, projects can ensure that their tokenization efforts are legally sound and maintain compliance with the specific jurisdiction's framework.

In Turkey, regulatory framework for real estate tokenization is still evolving. There are unofficially leaked plans for a Crypto Assets Legislative Draft that aims to regulate crypto assets and markets. Projects operating in Turkey enjoy the advantage of being situated within a dynamic jurisdiction that is continuously growing. Besides that, individuals in Turkey have a positive attitude towards crypto assets. Therefore, projects may choose to offer real estate tokens to individuals that are resident in Turkey or tokenize real estates located in Turkey.

Wherever they are located, projects need to form structured procedures for ensuring buyer protection, proper handling of digital assets, disclosing necessary information, and avoid any insider conflicts, threats, or violations of the applicable laws. Informing individuals about the potential risks and rewards of real estate tokenization is essential. Forming documents for clear communication and increased awareness can help individuals make informed decisions.

The Future of Real Estate Tokenization

The future for real estate tokenization appears promising as technological advancements, regulatory frameworks, and market acceptance continue to evolve. Especially the regulatory development and implementation of the concept of ARTs (asset referenced tokens) introduced by MiCA would be very interesting to follow. With the prevalence of blockchain technology in the regulatory area, the sector will benefit from a more solid infrastructure.

There are attempts in certain countries to integrate land records onto a blockchain to verify the land ownership and transactions such as United Kingdom, Sweden, and Georgia. This will provide transparency, traceability, and efficiency to the land administration and enable easy transfer of real estate between individuals by eliminating intermediaries.

With the maturity of technology and regulatory frameworks, it becomes more evident that real estate tokenization has the potential to revolutionize the real estate industry. It will continue to unlock opportunities, increase liquidity, and streamline transactions.

Projects must collaborate with professionals who can navigate the challenges and opportunities in this emerging market. You may contact us if you wish to obtain detailed information on this subject or discuss the relevant trends, technologies, and their legal aspects.