The investment group Abrdn has partnered with Citigroup to expand its investment options in real assets using blockchain technology known as Tokenisation. But what is tokenisation and how will it work in terms of commercial real estate?
What is Tokenisation?
Tokenisation essentially substitutes important information such as an account number with an alphanumeric row of characters. These tokens are randomly generated and irreversible, ensuring important information is not stored as a breakable encryption. This is achieved through blockchain technology.
A blockchain is a digital ledger of transactions and aims to record and distribute digital information that cannot be edited. A blockchain can hold a variety of information such as ledgers, legal contracts, identification and inventories. Each block contains a record of a number of transactions and a new record is added to every participating ledger when a new transaction occurs. This is known as Distributed Ledger Technology (DLT). This process ensures the security of the data, because if one block is affected it is immediately evident it has been altered. Essentially if someone wanted to alter or corrupt a blockchain system they would have to change every block in every chain and in every version of the chain. A blockchain is also decentralized, so it is not run by one specific person or company, it is essentially run through its users and the data is held in a database spread out over several networks known as nodes. So even if someone managed to alter a transaction in one node, the others would have a transparent order of events.
The easiest way to understand how tokenisation works as a consumer is through an example. Imagine you are looking to purchase a watch online from Shop A, at the payment stage you input your sensitive bank information. This data is then sent to a tokenisation server and is never seen or stored by Shop A’s servers. The issuing bank will authorise or reject the payment depending on your account balance. Once approved Shop A’s bank will receive a randomized token, and in the process Shop A has no access to your sensitive information.
Commercial Real Estate
The use of tokenisation to purchase “shares” in real estate has been developing over the years and is essentially a way to make a property publicly tradeable. Given that the legislation and infrastructure is not set up to purchase property directly through tokenisation at this point, you are currently able to purchase “shares” in a property through the purchase of shares in the company that owns the property. This was achieved with a student accommodation block in Nottingham, valued at £12.06 million. The security token platform, Smartlands, successfully sold out 30 per cent of the company that owns the property in September 2018, through the sale of security tokens meant to represent the shares.
The use of tokenisation has been looked at by Her Majesty’s Land Registry (HMLR) in a case study carried out by ConsenSys Codefi, in which a prototype “Title Token” was created as the digital version of the traditional title deed
The case study had proprietors request Title Tokens representing shares of their property, and follow the verification process. The HMLR then transfer the Title Token to the proprietor’s digital wallet where they can create security tokens. Once they finalise specifications and how many security tokens they wish to trade they place the property on the digital marketplace.
The utilization of tokenisation reduces the exposure to data breaches. For a theft to take place the hacker would essentially have to change a token to their original data and jump over other security hurdles to do so.
In terms of the benefits regarding commercial real estate, the case study by HMLR demonstrated that tokenisation can be done and could possibly provide the following benefits for the transfer of real estate:
- Cost and Time- by investors uploading their own documentation and compliance and the process automatically providing smart contracts the time and money spent on multiple party deals is significantly decreased.
- Opportunity- by providing companies or individuals the ability to purchase a token or share in a property, who may otherwise be unable to afford an entire property.
- Transparency- regulators as well as investors are able to access and view token data including pricing, chain activity and when trades take place.
The use of blockchain and forms of crypto technology does lend itself to various risks and down sides, this includes:
- Significant technology cost associated with mining the likes of bitcoin;
- Low levels of transactions given the maturity of the concept;
- The historical use for illegal activity;
- The lack of regulation and legislation, as well as the discrepancy by jurisdiction; and
- The limitations of how much data can be stored.
As highlighted in a speech given by Charles Randell, Chair of the Financial Conduct Authority and PSR, to the Cambridge International Symposium on Economic Crime in September 2021, speculative crypto tokens are not currently regulated by the FCA. Consumers are therefore not covered or protected by the Financial Services Compensation Scheme if they were to be scammed by an irreputable source. The FCA also has limited powers regarding the regulation of cryptoassets for anti-money laundering purposes, therefore enabling transactions to be used for financial crime.
Given that the use of a DLT transaction to sell and purchase property does not meet the formal legal requirements of registering the transfer of ownership in the Land Register of Scotland, or the Requirements of Writing (Scotland) Act 1995, the transfer of property and land through tokenization still seems to be some way off.
Property tokenisation may seem like a concept of the distant future. However, as society, technology and legislation adapt to these futuristic changes it is never too soon to weigh up the risk and rewards of these developing property investment opportunities.
For any help or advice please speak to a member of the Blackadders Commercial Property Team working in Aberdeen, Dundee, Edinburgh, Glasgow, Perth and across Scotland.
Annie McNamara, Trainee Solicitor
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