Real Eestate Tokenization Use Case

1. Introduction

1.1 Qitmeer Public Chain for Real Estate: an overview

In recent time, real estate transactions are conducted in ways which, by and large, have not yet been affected by the recent technology revolution. Investments in real estate can only be made through inefficient processes involving multiple intermediaries. As a result, it is unnecessarily costly and complicated for private investors to directly or indirectly own real estate assets.

With the recent rise to prominence of the blockchain technology, it is now possible for counterparties to exchange value in a decentralized and cost-efficient manner. Soon, private investors will have the possibility, through a website or mobile app, to efficiently invest in a variety of assets. The blockchain will disrupt transactions as internet has disrupted communications, and the transactional costs to invest will soon become marginal.

One of the advantages of blockchain (or distributed ledger) technology is that it allows for the instant, secure, traceable and cryptographically secure distribution and transfer of highly customizable, digitized exchange units without the need for intermediary parties trusted by both sides of the transaction.

This feature distinguishes such digitized instruments from conventional securities and has made offerings utilizing blockchain technology a liquid and innovative way to raise capital for emerging and established companies alike. The Qitmeer public chain project is a new step in that area . We will set-up a private corporate fund that will purchase, develop and maintain real estate across the MENA regions and beyond. It will be managed by an experienced team with proven track-record and governed by smart contracts on blockchain .

By using blockchain technology we are creating a platform that will enable everyone to benefit from real estate investment and opportunities in distress market . It will act as a transactional hub between a fund and the Qitmeer token holders themselves who will benefit through the increasing value of Qitmeer token. Twinned with that, the Qitmeer token/Coin will be used as payment means in every transaction related to properties owned by the Fund to ensure safety, security, and transparency. All services will be payable solely in Qitmeer tokens that will be offered to users in the upcoming investment model. The Qitmeer token is one of the first cryptocurrencies to combine distress real estate opportunities with blockchain technology. The Qitmeer token is classified as an utility token since the owners will not have any ownership or shares of the corporate private fund and do not receive any dividend. However, they will be able to benefit from its use and deployment through the platform .

2. Why Tokenization of Real Estate

Tokenization is the process of converting rights to an asset into a digital token on a blockchain and is expected to have a serious impact on liquidity across multiple asset classes in the decade to come.

Thousands of years of property ownership has led to a wide variety of types of ownership and control such as holding property on behalf of another person. The details depend on the jurisdiction, type of law, asset, and the rights intended to be transferred. Today, real-world assets like stocks, gold, oil or real estate are difficult to physically transfer or subdivide, so buyers and sellers choose to trade paper that represents some or all of the asset. But paper and complex legal agreements are cumbersome, difficult to transfer and can be hard to track.

Blockchain and smart contracts offer the required technology to evolve to a digital system linking tokens to a real-world asset. The Qitmeer’s goal is to achieve the security, speed and ease of transfer of cryptocurrencies (e.g. HLC token, Bitcoin, Ether), combined with a real-world asset like real estate. In a digital system like Qitmeer, Bitcoin or Ethereum there is always consistency, trust and transparent. Transactions obey the rules of the software and there are no exceptions. In the real world, there are often exceptions. Therefore the key challenge for a system that involves tokenizing real-world assets like real estate is to ensure that the digital token stays linked to the real-world asset. There are four reasons why tokenization is a new future for real estate:

2.1 Smart Contracts

Smart contracts are computer protocols which can facilitate, enact and verify contracts which are traceable via a public ledger. These contracts can be of huge value to the real estate industry by enacting transfers in a more transparent, traceable and efficient way than ever before. The use of smart contracts in real estate also opens up a pool to global investors and purchasers who are now able to invest across borders, bolstering new international investment opportunities.

Applicable to everything from home searches to rental agreements and more, smart contracts can provide smooth, fraud-proof transaction and agreement processes without the use of costly third-parties and intermediaries. By using smart contracts and drastically reducing costs, real estate investment has also become more accessible to younger investors who have typically turned to crypto investments above other assets.

2. 2 Liquidity

Traditionally, real estate has been a safe but illiquid asset, effectively locking away the investor’s money for extended periods of time. An asset with high liquidity on the other hand, can be changed into cash quickly and with relative ease. Real estate assets can become liquid, but the costs and timing associated with the process remain high. Tokenization introduces this liquidity in a simpler way through tokens which can be traded at all hours from nearly anywhere in the world. Higher liquidity can also have a positive influence on the value of assets by removing intermediaries and helping investors maintain current costs and prices.

2.3 Fractional Ownership

Fractional ownership is another major draw to be found from tokenizing the real estate industry. In the majority of blockchain networks tokens can created even when representing a physical asset which wouldn’t traditionally be divisible. This brings the possibility of fractional ownership to real estate investors and entrepreneurs.

Similar to shares, tokens can represent a stake in an asset, with multiple owners who can gain profits with lower overall exposure to risk. With fractional ownership, token holders could even own shares in a rental property and collect a portion of rent as passive income on a regular basis. This is a big draw to newer investors looking for a gentler and more risk-averse entry to real estate investment, and who were previously unable to invest in the sector due to high thresholds of traditional REITs.

Benefits of Security Tokens

Benefits Traditional VC Cryptocurrencies Security Tokens
Regulatory Oversight :heavy_check_mark: :heavy_check_mark:
Automated KYC/AML :heavy_check_mark:
Low Cost / Affordability :heavy_check_mark: :heavy_check_mark:
Fractional Ownership :heavy_check_mark: :heavy_check_mark:
Global Liquidity Pool :heavy_check_mark: :heavy_check_mark:
Time to Liquidity < 1 Year :heavy_check_mark: :heavy_check_mark:
Regulatory Oversight :heavy_check_mark: :heavy_check_mark:
Automated KYC/AML :heavy_check_mark: :heavy_check_mark:
Low Cost / Affordability :heavy_check_mark: :heavy_check_mark:
Fractional Ownership :heavy_check_mark: :heavy_check_mark:
Global Liquidity Pool :heavy_check_mark: :heavy_check_mark:
Time to Liquidity < 1 Year :heavy_check_mark: :heavy_check_mark:

Due to their programmable nature, security tokens are naturally more efficient and scalable. They allow for the automation of a multitude of functions that are performed by service providers in traditional finance. Security tokens drive greater price discovery by providing access to a wider pool of international investors. All this while being regulated and compliant. Blockchain and smart contracts have the ability to address inefficiencies in the financial industry. The major economic benefit being cost reduction, derived from optimising functions such as:

  • Accounting and audit processes
  • Paperwork related to managing securities (e.g. collecting signatures, wiring of funds, etc.)
  • Issuance and transactions fees charged by middlemen
  • Enablement of real-time settlements on secondary markets, therefore decreasing settlement risk
  • Automation of dividend payments and execution of other contractual items.

2.4 How investors and owners benefit from Tokenization

Tokenization removes the middle man, making it easier and cheaper for investors to buy/sell real estate and for owners/developers to raise capital. Investors can trade tokens almost instantly and for a very low fee (similar to stock market trades). For owners, tokenization makes it possible to raise capital without financial intermediaries to underwrite the project.

Real estate has historically delivered attractive returns, but it has high barriers to entry because the assets involved are so expensive. Investors in tokenized real estate assets get the best of both worlds: the high returns of real estate investments (even with a very small investment), and the liquidity of the stock market.

It’s also important to note that because real estate tokens are backed by real assets, they carry far less risk than cryptocurrencies or ICOs, which are highly volatile and speculative assets. What’s more, stabilization measures can be put in place to ensure the value of the security token does not deviate too far below the underlying net asset value (NAV) of the property.

3. The future of Commercial Real Estate Tokenization

The global real estate market is valued at US$228 trillion. Before the tokenization of real estate, only accredited and institutional investors had access to the most exciting projects. But now asset owners and developers can market their projects to retail investors as well as institutions.

Tokenization also brings much-needed liquidity and transparency to a traditionally opaque industry. The ability to trade shares in real assets, in real-time (the same way public companies are traded in stock markets) should attract more investor attention and unlock the potential for more ambitious and unique real estate developments.

Of course, investors can already buy and sell real estate investment trusts (REITs), but these often have high minimum investments and represent a large portfolio of companies rather than a single property or new development.

The tokenization of real estate is giving investors and owners alike the freedom to raise/invest capital how they choose. Tokenization will also impact other illiquid asset classes, like private equity and venture capital.

4. Real Estate on Qitmeer public chain platform

In the real estate investment, there is always potential buyers for units in real estate investment and are not familiar with crypto assets. Qitmeer public chain platform will enable them to pay units in fiat currency according to market price of Qitmeer token at that moment + additional fee (of up to 4 percent) . Platform will then immediately change this to Qitmeer token through exchange. Reason for offering this solution is not to limit purchaser base only to community that is familiar with crypto currencies, but to offer it to general public as well. Qitmeer believes that this solution will also benefit the Qitmeer token holders, because it will enable easier entrance barrier to Qitmeer ecosystem and increase growth value potential for the Qitmeer token . However, Qitmeer team predict that the Qitmeer public chain platform will be operational by last quarter of year 2019 as well as first units from pipeline will be available on platform for the real estate buying and selling as explained in below Diagram:

4.1 Real Estate Structure

Description :

  • The developer through Qitmeer platform will tokenize the asset according to market price of Qitmeer token);
  • The investor will send token to Special purpose Entity (SPE) in order to reduce the cross border transaction risk
  • Property: Each token was backed by shares through an SPV that owns the real estate investment.
  • Tokenization/SPE: The SPE rent the real estate property to consumer and receive the payment through consumer’s wallet.
  • Consumer: the SPE will rent the property to consumer as property can now easily flow on a blockchain ledger in a transparent, frictionless and immutable manner. The consumer get the Investment value as property appreciates.

4.2 Investor onboarding and Token sale

Users wishing to purchase a property which is held by the fund must do so in Qitmeer tokens. Anyone wishing to purchase a property which is held by the Fund will be able to purchase them through Qitmeer platform. If the buyer is a non-holder of Qitmeer tokens, he will be able to pay in fiat currency (additional exchange fee will be charged) and Qitmeer platform will be obligated to exchange received payment to Qitmeer tokens in shortest time possible .

While this is a fundamental compliance measure, which is offered by virtually all tokenization platforms (or specialized third-party providers), you should not leave the KYC/AML/accreditation process unsupervised in a technology provider’s hands. First, if proper KYC/AML/accreditation verification fails, the issuer could be held directly liable for violating U.S. and international anti-money laundering or securities regulations, even if such failure is caused by a third-party provider. Second, if a service provider is incapable of completing proper KYC/AML verification per the issuer’s requirements (including incorporation into the issuer’s website, timing, number of purchasers, geographical scope and ability to accurately process foreign-issued documents), the investors may be lost and the offering’s proceeds may diminish significantly.

Not only quality but also timing of the KYC/AML/accreditation checks is critical. The checks should be conducted before investors make any payments, even if the payments are still subject to approval and possible return. Holding payments from a blacklisted person may expose an issuer to liability risks that could not be negated by simply returning the questionable funds to such person. Some issuers and platforms overlook this sequence and expose themselves to unnecessary liability

4.3 Renting to Qitmeer token holders (Ijarah)

Those users who have signed up to the platform will be able to rent properties (tourism, commercial and residential) owned and operated by the Fund for favorable rates compared to general public . Payment will be made solely in Qitmeer tokens . Renting to the general public Anyone wishing to rent a property held by the Fund must do so in Qitmeer tokens .

5. Conclusion

Qitmeer, as a DAG based basic chain, with its significant technical attributes in the area of underlying security and high throughput, would be used as the technical platform to accommodate all the applications, as well as acting as the multi-layers payment and settlement system. The basic chain has been uniquely designed and developed aligning with Islamic finance principles from its technical consensus, community governance mechanism, ecosystem incentives to industry applications.

Please be advised that this Document is Draft proposal and the Qitmeer Foundation reserves the right to make any necessary amendments/changes. The Draft can not be copies and kindly refer and consult Qitmeer for the final version.

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