Blockchain tokenization of real estate investment: a security token offering procedure and legal design proposal

ABSTRACT

The article addresses the legal design challenges of real estate crowdfunding, proposing potential solutions that combine blockchain technology, tokenisation, finance, and law. We propose a blockchain tokenised security design, based on a sertificate similar to Sukuk, an Islamic finance asset, that draws inspiration from Equipment Trust Certificates and is managed by a Special Purpose Vehicle (SPV), that may issue blockchain tokenised certificates. These certificates grant rights related to an investment property. Each series of certificates represents specific property and will be a liability of the SPV that owns the property. In general, the tokens used resemble but remain categorically distinct from asset-backed securities. Their performance still depends on the underlying asset’s performance. Most important, token owners do not become partners in the SPV but are granted fractional ownership and rights on the underlying property. The proposed token mechanism could prevent delays in the transaction process related to transferring ownership of a property. It could split at some point to allow for the creation of ownership and income rights. The proposed security design potentially protects investors’ legal rights better without standard application of investors becoming partners in the SPV while shortening the transaction times, and increasing transparency and asset liquidity.

KEYWORDS:

• Blockchain
• tokenisation
• special purpose vehicle
• contract design
• smart contracts
• real estate investment

Abbreviations

KYC: Know Your Customer

REIT: Real Estate Investment Trust

SPV: Special Purpose Vehicle

USD: United States Dollar

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Securitisation is the issuance of tradable securities, which are often secured by illiquid assets. This is usually provided with a special purpose vehicle, whose sole purpose is to issue this security. The illiquid assets would be on the balance sheet’s assets side, and the issued securities would be on the liabilities side of the issued securities.

2. State of Delaware in the US provides the legal infrastructure for blockchain maintenance of corporate records.

3. Securitisation is the issuance of tradable securities, which are often secured by illiquid assets. This is usually provided with a special purpose vehicle, whose sole purpose is to issue this security. The illiquid assets would be on the balance sheet’s assets side, and the issued securities would be on the liabilities side of the issued securities.

4.  .

Additional information

Notes on contributors

Gurcan Avci

Gurcan Avci is a PhD holder in Financial Economics, worked as a Director for Ernst & Young’s Advisory department and the supervision group of the Banking Regulation Authority of Turkey. He worked for the Basel Committee to design within the framework new global financial architecture and attended several meetings of the Global Public Policy Committee, IASB and FSB to enhance the contribution of corporate governance to financial stability. Currently, Dr. Avci manages various fintech-legal projects with his consultancy firm, Finahukuk.

Yaman Omer Erzurumlu

Yaman Omer Erzurumlu Erzurumlu received the B.S. degree in engineering management from Istanbul Technical University, Istanbul, Turkey, in 1998, and the Ph.D. degree in finance from the University of Central Florida, Orlando, FL, USA, in 2006. He participates as consultant in Fintech projects and financial consulting with different small and medium enterprises. He is affiliated with the Engineering Management Department, Bahcesehir University, Istanbul. Erzurumlu is currently a visiting research scholar in Babson College, USA. His research interests include mutual/pension fund management and governance, fintech applications, entrepreneurial finance, and innovation strategy. Dr. Erzurumlu is also a member of the Financial Management Association (FMA) and a CFA charter holder.