Author: kiman

What is tokenization and why is it relevant for the real estate industry? To understand this, we need to look at bitcoin and blockchain.

Tokenization refers to the process of digitizing securities and representing them as tokens on the blockchain. The most common types of securities to be tokenized are company equity and debt instruments such as bonds. Once the security has been digitized and rendered in the form of a blockchain token, the security can be managed in a fashion that is quite similar to bitcoin and other cryptocurrencies (tokenized securities are also called security tokens, digital shares and digital assets). This has wide-reaching implications, such as the ability to store shares and bonds in digital format on your own computer or mobile device and the ability to trade these in a peer-to-peer fashion directly with the counterparty (but with no counterparty risk).

The blockchain has been described as a trust and value-layer on top of the internet. It is similar to the internet because it is decentralized and not controlled by any single central entity. It is also the facilitator of an enormous amount of new business models based on the digitization of trust and value. With blockchain, there is a trusted and agreed upon understanding among participants in a single ecosystem. This agreement encompasses who owns certain amounts of bitcoin, and who owns certain amounts of shares in specific companies. This agreement also includes their value in relation to each other as a huge decentralized and anonymous share cap table. This trusted and agreed upon understanding does not require any centralized middleman to function; it is a built-in property of the blockchain.

In addition, blockchain has for the first time enabled a digital representation of value in the form of cryptocurrencies such as Bitcoin and Ethereum, as well as “normal” currencies such as USD, EUR and GBP in digital form. Blockchain is the first technology to solve the fundamental problem of double spending where it must be impossible to spend a digital currency more than once. Therefore, it has been possible for the first time to create digital currencies that people can hold in their own digital wallets on their computers or mobile devices without relying on a bank or other central authority to safeguard it.

Why does this matter? The digitization of currencies and assets has made them programmable. It is now possible for software companies to develop financial business models that are self-contained and not hindered, slowed, or rendered uneconomical through bank integration and involvement.

On October 31, 2008, the famous research article “Bitcoin: A Peer-to-Peer Electronic Cash System” was published. This article presented the solution to the double spending problem and enabled the digital representation of assets on the blockchain. Since 2008, the blockchain industry has grown from zero to around $237.1 billion in new realized value due to (1) the ability to safeguard your own digital assets, (2) the ability to safely transfer these to others in a peer-to-peer fashion with no bank involvement, and (3) the ability to manage and manipulate these digital assets through software programs (also called smart contracts). The consensus among industry experts is that we are still in the early stages of realizing the value of blockchain. Analyzing where we are in this process, we can compare the time frame to the introduction of the Netscape browser (1995).

The growth of internet users vs growth projection of cryptocurrency users in the world. Source: Internet vs Blockchain Revolution: Are we in 1994? What to expect next? (Remi Gai)

You are probably still wondering why blockchain — and indeed tokenization — is relevant for real estate. There are several reasons. Real estate properties can be tokenized and it is typically done in two ways. Either the equity of the company owning the property is tokenized, or loans provided by investors to finance the property are tokenized. In the first case, each token refers to one share with regular dividend payouts. In the second case, each token refers to a loan note held by the investor that provided a fraction of the loan. The loan note entitles the investor to regular interest payouts. The digital share further entitles the investor to a share in a potential profit when the property is sold; a loan note often does not give that right.

Real estate represents the biggest single asset class that may be tokenized. Global real estate is around $228 trillion and only 7% of this is available to retail investors. Only 3% of the global population has invested in real estate, but more than 80% views real estate as a good investment. Efficient trading with real estate assets does not exist today and increased liquidity could potentially increase the existing market with a 20–25% liquidity premium.

The real estate industry is plagued by slow, expensive, cumbersome, and paper-based processes relating to the financing and management of projects. Financing is often done by a bank and a few trusted investors able to meet the EUR / USD 100,000 minimum ticket size. Investors are locked in for several years and there is no easy or inexpensive way to sell shares beforehand.

Tokenization of real estate assets solves all of the above problems. Most processes related to financing and ongoing management can be digitized and even automated. Due to the 100x more efficient processes, it becomes possible to manage thousands of investors in a single project and hence to reduce the minimum ticket size down to $1,000 or even $100. This gives the real estate developer access to new types of investors and new sources of capital. With the growth of the total amount of capital, the financing of real estate projects should become easier and less expensive.

Having real estate assets in a tokenized form allows for peer-to-peer trading with instant settlements. Real estate investors will be able to trade their digital shares or loan notes directly with each other in a safe and secure manner. Since the only way a security can exist in digital form outside a bank is as a token on the blockchain, this is the first time direct trading between individuals becomes possible. It only works with blockchain technology.

Last but not least, retail investors can obtain access to real estate investments. Real estate investors can now diversify their portfolios in a manner that is similar to the method wealthy investors have used for hundreds of years. This is also known as the democratization of real estate investments.

Tokenization of real estate enables developers to reduce the cost of financing and ongoing management, to target new types of investors, to more easily finance new projects, and to increase the liquidity of assets.

This is slowly becoming reality in 2020. Some of the last barriers to adoption are being removed. Knowledge and comfort with crypto is becoming more widespread. Software platforms are becoming easier to use to the point where little knowledge of crypto is actually required. Platforms that are tailor-made for real estate tokenization such as the DigiShares white-label platform are becoming better. Pioneers among real estate developers are taking steps to become entrepreneurs in their local region or market segment. All of the different puzzle pieces in the new tokenization ecosystem are slowly falling into place.

Contact us here: info@digishares.io if you are interested in learning more and don’t forget to visit our website to keep up with our progress.
Claus Skaaning, CEO, DigiShares
October 2020

Tokenize Your Real Estate

Many of our current projects are real estate tokenization projects, and for those of you who are specifically interested in real estate tokenization we have created a special page where you can learn about real estate tokenization and how to tokenize your project.

Learn more

Written by: Agata Blichewicz

When we think about tokenization of assets the first thing that comes to our mind is the real estate sector. Indeed the biggest interest we are experiencing at DigiShares comes from this field. Till recently investors in this sector had to invest big amounts, especially when they wanted to get an attractive ROI. Nowadays, thanks to the blockchain technology and our security tokens’ issuance platform, investing in real estate becomes more and more accessible to retail investors allowing them to buy even for a little amount of money a fraction of e.g. a big development project.

However, there are many other alternative kinds of investments we’re exploring and working on. The real estate model can be easily transferred to the energy sector. Our tokenization platform can facilitate funding not only of a solar or a wind farm but also e.g. of a biogas or a biomass plant. The holders of such digital shares will be receiving a dividend that reflects the share in the revenue of the energy company which is generated thanks to the tokenized investment project.

When you think big you can also use tokenization to fund big state or public infrastructure projects like e.g. a clinic, a school, a bridge, a highway, heating or telecomunication facilities, pipelines, railways, IT or water infrastructure. The token holders will earn dividends either on the revenue a project gets from end users or on the lease paid by the (local) authorities. Infrastructure long term tends to be less volatile than e.g. equities and provides higher yields.

There’s been also a growing interest in the mining industry. Our solution can help collect funds to open a new mine or tokenize already mined precious metals or diamonds. The investors of such projects will be holding tokens backed by the value of the mined minerals and will be able to trade them accordingly to their value changes.

One of the alternative investments that has been recently booming is fine art. On daily basis we hear about a new auction record and the highest price ever paid for different pieces of art. Thanks to our tokenization platform fine art investors will not have to go out of the house and spend lots of money on a complete piece of art. They will have the opportunity to own fractions of many of them. It will spare them the necessity and costs of keeping it safe, putting all their money in one asset vs. diversification and will give them the access to the most known and valuable pieces of art.

Another great example is the marine shipping sector which carries out most of the world trade flows. In order to buy new vessels and expand their fleets, shippers borrow huge amounts of money. Investors who are not afraid of volatility may be rewarded with attractive dividends if they go for companies that lease their ships to customers at the going market rate, the spot market. Those who prefer lower but more stable and predictable ROI may choose to invest in shipping companies that offer their clients long-term agreements with a fixed price. Tokenization will help shipping companies fund their new vessels in a cheaper, quicker, and more efficient way and will bring them a new stream of retail investors.

If you find these alternative assets relevant to you, or you thought of others that could be tokenized, contact us to arrange an introductory call.

Taken from the 22-April-2020 Tokenizer.io interview
Interview by: Michael Juul Rugaard

Could you please give just a brief presentation of DigiShares?

DigiShares is a provider of white-label tokenization solutions for security token issuance, corporate management, and trading. Our preferred client is an asset manager or financial services provider that wants to offer tokenization capabilities to their own clients. As a company, we have chosen a focus on the real estate industry as we view it as the largest potential homogeneous market for tokenization. The real estate industry is plagued by complicated paper-based workflows and very low liquidity, so a good target for tokenization.

How is the corona crisis affecting your company?

The corona crisis has had several effects on our clients, most of them negative. Many of our clients have existing real estate properties that they own and operate, including hotels and residential buildings. They are experiencing that their renters are stopping to pay rent and that their hotels are closing down. Obviously they are going to focus their efforts on keeping their existing assets alive and not on creating new ones. Other clients are seeking to raise funds for real estate development projects from retail, professional and/or institutional investors – however, many retail investors are going into cash and many professional and institutional investors are refraining from new investments in order to protect their existing portfolio.

So there is no doubt that we will see a postponement of many tokenization projects, certainly in the real estate industry, for at least 3-6 months, potentially longer than that.

DigiShares as a company will survive. We are set up for the long haul and can survive almost indefinitely on the current activities of the company. However, part of the tokenization industry is venture-funded (or STO funded) and may suddenly start to suffer from “premature scaling” – the number one cause of startup failure.

What is your analysis of how the crisis may impact the emerging industry of security tokens and asset tokenization both in the short and long term?

The short term effect will surely be negative and will cause parts of our ecosystem to die or weaken. The roll-out of the global tokenization ecosystem will surely be delayed. For a period of time, tokenization as a concept will not be as interesting or attractive in the eyes of investors.

The crisis will force us to reinvent ourselves and to find new ways to be relevant and provide value. Some elements of our value proposition have the potential to make tokenization increasingly relevant during a crisis, such as:

Claus Skaaning Digishares CEO

• Democratization and fractional ownership: ticket sizes can be reduced dramatically to enable retail investors to invest in hitherto inaccessible types of assets. The total amount of investors that can be approached for any given capital raise will be higher. In times of crisis, it may be easier for investors to part with a small amount rather than a big one.
• Cost reduction: the ability to automate 90% of the issuance and corporate management workflows leads to a great cost reduction. Self-sovereign (well, almost) security tokens on a non-permissioned blockchain enable us to remove middle-men that are acting as guarantors for the presence, ownership, and value of assets and create an additional cost reduction. Technologies that perform better at a lower cost are bound to have an advantage during a crisis.
• Access to international investors: as opposed to earlier types of digitized securities, we, in the security token industry are actually working together globally to create standardized inter-operable securities that can be issued in Denmark, transferred to Singapore, and traded in the US. Governance and compliance are built into the smart contracts and the token becomes able to move across borders in an automated fashion. This causes a great cost reduction but also very significantly opens up the scope for international investors to participate much more easily in Security Token Offerings (STOs) than what was seen previously.
• Increased liquidity: during a crisis, cash is king. More liquid investments will always be preferred over less liquid investments, and even more so now, during the crisis. While security token exchanges are still not present to any significant degree, solutions such as the DigiShares platform offer some liquidity to investors – right now – right here.
• Increased design scope: paraphrasing Marc Andreesen, “software eats securities” – securities are becoming fully software-based, including governance, cash flows, voting rights, risk balancing, asset allocation, etc. The scope for designing new types of securities is exploding, enabling us to design securities that are more suitable to times of crisis. The risk-reward ratio may be fine-tuned to more precisely match investor requirements.

I have spoken to several of my colleagues in the industry and there seems to be a consensus that for the above reasons, the tokenization industry will emerge stronger after the crisis. Our value proposition will become more sharply focused on the areas where we actually provide huge value compared with the status quo.

Has it become significantly more difficult to raise investments for industry development?

I spoke with a venture capitalist last week. He said that most VCs were postponing new investments and instead focused on keeping their portfolio alive. I believe this is a quite general sentiment that we as an industry must take seriously. The tokenization industry suffers (like most other industries) and like any other industry we have to find ways to provide value throughout the crisis – both to survive but also to help the world recover from the economic setback.

The STO market was just about to take off when the corona hit the world – is that market drying out now, and when will it be back on its feet and ready for a new take off?

I am not sure the STO market was about to take off prior to the corona crisis starting up. Actually I think the industry as a whole was still struggling to prove its relevance and get its act together to showcase some convincing STOs with real value to both the issuer and investors. This work will surely be delayed but as indicated above, I believe the corona crisis may actually strengthen the tokenization industry and force us to focus on bringing real value to our clients in terms of automation, cost reduction and increased liquidity.

In my estimation, we are looking at a 3-6 months postponement. I believe parts of the global industry will recover faster than expected, but other parts will linger for years. Our technology is industry-agnostic, so we will just focus on those types of industries and investors that are fast to recover.

Is there anything that the security token industry can do proactively to help combat the global crisis?

There are some specific application areas where tokenization may provide real value during the corona crisis and actually help the world recover. We actively seek collaboration with companies and individuals who are interested in working on these, such that we can do our part in the recovery. Some of these areas are:

• Startup fund-raising: growth-stage startups are severely hit during the crisis. They have invested heavily in future growth and have budgeted with a period of being cash flow negative in order to achieve market domination. But this period will now suddenly be much longer. Token-based equity crowdfunding is surely the answer to this. Many growth-stage startups have a community that may be activated to help save the company and they may be able to obtain bridge investment from retail investors when the VCs have closed their wallets.
• Fund-raising for infrastructure or cultural institutions: many infrastructure-type companies are dying now. With infrastructure implied in the broadest sense possible. The local neighborhood restaurant is closing down. The airline responsible for 20% of a country’s connectivity is shutting down (Norwegian in Denmark). A ferry route that is bringing foreign tourists to a local region is shutting down resulting in huge losses for the tourism industry. What if the community or industry that is dependent on the company or operator could equity crowdfund a bridge loan to keep it alive? The security that is issued could contain special benefits for the investors, such as free tickets, free meals, discounts, etc. hence the increased design scope

Tokenization is part of the overall DeFi trend, and if you look at the current crisis from a more overall perspective would you agree that something like the corona crisis where suddenly people are unable to meet up and act in the physical world only confirms that digitization is becoming increasingly important and so are next-generation digitization like decentralized finance solutions?
Yes, certainly. The tokenization industry is 100% about digitization and any industry that has digitization as its basic raison d’être stand to gain from the crisis. All else being equal, it will become more natural for people to take investment decisions without prior face-to-face meetings. The real estate industry is very traditional in this regard and many deals are settled with a handshake. When handshakes are no longer an option, maybe some of these deals can be settled with an electronic signature instead?

Do you have any advice for the industry about how to get the most out of the current situation?
Re-adjust your burn-rate to account for lower income during 6-12 months to ensure survival. And sharpen your focus to provide real value, both during the crisis and after.