Blockchain, tokenised property and the Middle East
The built environment has always been a significant and often lucrative area of focus for Middle Eastern business, whether it be large-scale construction projects, reclamation of land or opportunities for investment in bricks, mortar and steel.
However, looking to the future of real estate in the region we must think more broadly about possible futures for various transactional or investment markets. An example of this is in the increasing use of blockchain, and assets being secured by it. This topic is very present at the moment on legal and business horizons, owing to how wide-reaching the potential ramifications may be.
This article considers blockchain technology, and how it can be valuable in terms of real estate, then considers how the Middle East is embracing it.
What is blockchain?
Although a familiar word in both business and in conversation the actual meaning of blockchain can become easily misconstrued. Often blockchain is used wrongly as a synonym for cryptocurrency, or to refer to an untouchable means of payment. Giant names in the media like Bitcoin or Onecoin, for example, have for different reasons become the publicly recognised reference point for the technology.
At root, however, blockchain is a digital/online ledger and is not itself a currency. The blocks that form a blockchain are pieces of data that are extremely densely secured using cryptography to disallow third-party interference or modification. Each change is deliberate and recorded. Applying this technology to cryptocurrencies, as mentioned above, we see that digital currencies that have found success by being transparent and immutable and an alternative to any fiat currency - all as a result of applying blockchain technology
Using a rolling ledger system blockchain can be employed to record ownership of, in theory, any asset that users may want to log. Anonymity as a cautionary part of the ledger record has assisted with the adoption of blockchain in various industries, where there can be an absolute record of an asset's transaction from person A to person B but neither of those parties need necessarily be publicly identified.
What it tokenisation?
Once blockchain technology is applied to an asset class it needs a metric (being its value or amount from time to time) and the most crucial next step is deciding how we can represent that value.
Much like tokens that are familiar to us from games, a blockchain rooted token is an actual 'thing' that represents the figures. A traditional asset wrapped up inside a tradable piece of code becomes the token for that asset to then be invested, traded or held as a means of exchange or store of value.
Why tokenise real estate?
The value of a securitised asset is in how effectively it can be distributed, and that effectiveness comprises the accessibility, security and facility of it within a transaction. As an asset class real estate is more valuable in international terms than stocks or bonds and in many jurisdictions has an historic value as an inheritable realty. Property's position in the market seems unlikely to change, but the way we trade with and in it can do.
Tokenised real estate seems to proffer a financial inclusion to property investments in a way that would not always have been available to the "average investor". This means both a broader pool of investment with an inherently lower threshold of risk than traditional property investment, but also an investor class can be seen developing from the realms of tokenisation that has access to the secondary market for the resale of tokens.
Diversification of portfolios and an enriched investment landscape aside; it seems a viable assumption that with a more granular offering there should come more confidence in the market, meaning perhaps steadier growth, repositioned risk trends and a door opened to other illiquid asset classes to which tokenisation becomes a possibility.
A benefit in terms of transactional costs cannot be overlooked, being sometimes prohibitive when talking about property, as the administrative costs of dealing in tokens are, as reflects the current nature of blockchain ledgered assets, in the hands of users.
What is the process for tokenising real estate?
The starting point is to base the transaction in a blockchain platform that is properly regulated. This means that the ownership of tokens, at such time as they are realised, can be appropriately and legally stored. That platform would also need to have the appropriate technological and regulatory credentials to allow transfer of tokens.
Jurisdictional requirements vary or in some cases have not yet been legislated for, but in the Middle East, UK and USA the foundations of a secure centre for tokenisation is certainly developing.
Once the relevant platform is identified, the basis for the token needs to be ascertained which will require the asset to be valued. When a value is given and, importantly, supported by the market position of that asset (much like taking the opinion of one or two surveyors in a traditional property transaction),the property can be formulated in many portions (i.e. tokens) as are required.
With tokens issued the next step is to make a security token offering (often referred to as an "STO" or a "tokenised asset offering") which to date has been done using crowdfunding platforms or simply individuals selling to identifiable investors. An important niche of real estate assets as tokens is that the STO is not the same as an initial coin offering seen with cryptocurrencies, as the STO offers an investment in realty meaning that the market is much more visible.
In a nutshell, the real estate asset by this stage has been tokenised, and it is ready to be traded.
What progress for tokenisation in the Middle East?
The Middle East has always held a pivotal role in global commerce and its embracing of decentralised blockchain technology in business proves that that trend continues.
At the time of publication the UAE is the forerunner in the region for tokenisation having become host to the Gulf's first blockchain platform for hosting token commodities, and is developing the Emirates Blockchain Strategy 2021 (which aims transition 50% of UAE government transactions into the blockchain platform). The popularity of this type of investment has led to suggestion that over 2020 will see a rapid increase in more specific codified frameworks for tokenised assets, which will certainly pave the way for a more international audience that feels invited to invest.
To give a frame of reference: in the first half of 2019 the UAE was home to over £50 million in investment by way of 47 separate STOs. For context this amounted to over half of the total global investment through STOs in that period.
Considering Bahrain, the Kingdom is also being proactive in its encouragement of blockchain technology. The Central Bank of Bahrain has approved around 30 companies through its regulatory sandbox (i.e. to allow regulatory testing on a small scale) a proportion of which constitute "crypto services" including specifically tokenisation platforms. Bahrain has always been an industry force in finance for the region, and with a rapidly developing fintech ecosystem the future of asset ownership backed by technology in the Kingdom looks bright.
The forecast for commodities being tokenised is seemingly of a buoyant, progressive outlook and it would seem that the Middle East will act as a proactive testing ground, a market leader and a trendsetter for the blockchain-bolstered market.