Imagine commercial real estate transactions that are achieved with speed, transparency and efficiency. That’s the promise of blockchain and the related technology of the digital security token. Not only is it efficient, but it also offers a secure digital environment that complies with securities regulations.
Blockchain technology has been available for nearly a decade but is only now beginning to emerge as a major CRE industry disruptor. With the potential to digitize and accelerate the CRE investment process, blockchain is poised to transform CRE finance.
Here are three reasons why:
Blockchain is the ideal technology for CRE financial transactions
As its name suggests, a blockchain is a database of digital blocks of transaction data, each block timestamped and connected to the previous block via secure programming. Think of it as digital ledger that records transactions in a public or private peer-to-peer network. This can help with storing transaction documents such as property deeds, mortgages and shareholder agreements in a way that’s highly secure and impossible to alter or erase.
Rather than residing on a single server, a blockchain is replicated across many computers to create a self-managed distributed ledger. Because it’s decentralized, a blockchain enables every participant in a transaction to safely create and share the same data. This makes blockchain technology ideal to document payments and financial records for CRE transactions.
Blockchain offers smart contract capabilities
Bitcoin – which was the first widely adopted public blockchain technology – has laid the foundation for others to expand upon the concept of distributed computing. While Bitcoin is used primarily for peer-to-peer Bitcoin payments, other blockchains and cryptocurrencies have broader functionalities for automating transactions.
Ethereum, for example, is an open-source public blockchain platform. Using Ethereum, developers are able to build and deploy decentralized applications to facilitate an infinite number of functions such as the computation of complex financial transactions or even recording and processing highly confidential healthcare data. One advantage of Ethereum is that highly customizable “smart contracts” can be deployed on its network, enabling trusted automation of funds escrowed, distributed and recorded on the blockchain.
These “smart contracts” are bundles of code that can be utilized to specifically execute important parts of a blockchain transaction. They can manifest as a new ownership of an asset or ensure the legal compliance of a token exchange. Smart contracts can also enhance a contract in a CRE transaction with programming that facilitates and automates the transfer of assets and securities in accordance with the law.
Creating smart contracts isn’t the only advantage of using the blockchain in CRE transactions. Using the blockchain in CRE transactions can also minimize the need to involve third-party intermediaries like lawyers, banks or brokers. For instance, blockchain tokens can be created representing fractional or whole ownership of CRE-related assets that investors can use to trade directly with one another, empowering their operations.
And, instead of engaging a CRE lawyer to draft a contract for transfer-of-ownership purposes, the blockchain can quickly and securely keep a record in a permanent ledger of the assets that were traded or received.
Further, investors can bypass the need for using a bank to process transactions and running up banker’s fees by tapping smart contracts in the blockchain to facilitate trades.
Security tokens offer the CRE marketplace liquidity and security similar to the stock market
As blockchain technology becomes more widely adopted, the world of CRE transactions will be revolutionized forever. Security tokens backed by the real value of property and assets can be traded more easily and efficiently than they are today by cutting out the middlemen, creating real time auditable records, and establishing trust between all parties.
Because of their fungible nature, security tokens can also enhance a CRE asset’s liquidity – because they can be traded on a secondary market just as one can trade stocks and bonds. Tokens also can be programmed to process payments, such as dividends from an equity investment, sales proceeds or loan payments.
Ultimately, the value of a blockchain for CRE lies in its unrivaled transparency. Blockchain technology is a disruptive force when it comes to handling transactions, distributing payments and dividends, and ensuring trusted performance among parties.
Aaron Lohmann is the co-founder and current CEO of Earn.re, an online exchange platform that enables financing of commercial real estate via the blockchain. He has over 15 years of experience in executive management and has led the successful development of numerous companies and organizations.