There has been so much going on in the world of internet technology and finance over the past few years, it is easy to get confused and left behind. First, there was the cryptocurrency craze (mainly bitcoin, but a few others as well) that powered online payments. That made way in 2017 for a series of initial coin offerings (ICOs), which were a raise to raise money for a variety of startups, many in the tech area. ICOs resulted in about $13 billion being raised around the world, most avoided regulations, many were scams, and as a result by 2018, the term “ICO” was experiencing brand damage! The third wave, which is taking shape now, revolves around security tokens, which are an investment vehicle that is compliant with SEC regulations and has a lot of positive ramifications for real estate fundraising.
Right now, the industry is exploring how these tokens might function in the real estate industry. I have identified three ways security tokens could benefit real estate investor.
1. Cross-border Trading
Wish you could raise money internationally? Historically, it has not been really viable to raise money around the world because of the administrative challenges associated with KYC (know your customer) and AML (anti-money laundering). With between 20 and 30 countries presently aspiring to support security tokens, however, that could change.
Investors almost always want to close deals faster, and this technology is already reducing settlement times in stock trading. Using security tokens could reducing the timeline in real estate, like other investments, and could also create greater flexibility.
Liquidating a long-term real estate deal can result in big losses if an investor wants out early. Security tokens could provide a route to easier liquidation – by selling off the tokens – that would not result in such a “haircut” for investors.
Although security tokens are new and these three benefits somewhat aspirational, deals are already being done in this new space. Further, it may be that some aspects of the new Opportunity Zones (Qualified Opportunity Funds) that represent a tax mitigation strategy for US investors, might also benefit from Security Tokens.
Watching these mega-trends evolve across the financial industry will keep real estate investors ahead of the game.