EARN BLOG

earnAugust 1, 20210CRE Financing: Tokens vs. Manual Certificates

Manual certificates have been the norm of CRE financing. But tokenization is improving and transforming how investors handle their commercial real estate assets.

Tokenized real estate has become a buzzword in recent years, but the consequences for streamlining CRE financing are becoming more and more concrete. In particular, tokenized real estate securities highlight the inefficiencies around the manual certification process and ownership.
When it comes to CRE financing, investors suffer from various issues:
● A lack of transparency
● Slow transactions and settlements processes
● Illiquidity
● Redundant processes
● High risks and compliance requirements
All of these items result in “hidden costs” or revenue leakages and higher risks for investors. Manual processes only add to the errors, complexity, and lengthy transaction time.
Digital transformation can alleviate many or all of these problems, depending on your chosen infrastructure. For most, tokenization is the simplest and most cutting-edge solution on the market.

What is a security token?

A security token is simply a security held in book-entry form that is recorded to a blockchain. Unlike other crypto-based investments, the SEC regulates a security token and issuers must abide by KYC, AML, and other security-related requirements. They cannot be traded anonymously, but since these securities are regulated, security tokens offer more protection than other crypto investments.

Tokenized investments are also flexible. A token can represent many things, including direct ownership, REITS, timeshares, equity, or debt. Furthermore, these tokens can be applied to all types of commercial real estate investments, from warehouses to retail stores.

While token securities are based on blockchain technology, they are not necessarily linked to cryptocurrency. For example, at Earn.re, even though securities are issued as tokens, only fiat currencies are used to fund transactions and make distributions.

How is a token different than other digital alternatives?

Digitization for commercial real estate isn’t new. But it has been limited by the expectation that digital real estate ownership should be bought like stocks, with the same types of platforms and technology.

The issue is that typical digital solutions may be rigid or require several integrations to cover compliance and data security.

Real estate tokenization on the blockchain provides a significantly different and more usable experience than most other CRE financing platforms. Data security is baked into the system, unlike other solutions, since blockchain and tokens stem from cryptography.

And unlike other platforms, blockchain and tokenization cut out many middlemen — thus reducing costs while speeding up the process. One way tokenization allows investors to bypass intermediaries is through the use of smart contracts, highly customizable and automated rule sets that require little or no interference.

Ultimately, blockchain technology provides a faster and more secure platform for transactions and settlements while retaining enough flexibility to scale.

Investing in the future of CRE financing

The shift towards digital processes — blockchain-based or not — is rooted in numerous existing challenges and outdated procedures that drive up the cost and limit real estate investment liquidity.

First, there is the need for a fast and dependable workflow — one that takes minutes rather than hours or weeks. Next, modern CRE financing platforms provide enhanced liquidity. Automated transfers and efficient listing on regulated secondary market exchanges are two ways that digital platforms can improve an investment’s liquidity.

Of course, with increased identity verification regulation in the form of KYC and AML processes, these platforms should also reduce risk by enforcing security protocols.

In addition, investors are looking for both transparency and accuracy in their automation. While data should be secured, stakeholders should be able to verify the authenticity of data.

Tokenized investing can do it all

As a paperless, more sustainable alternative to manual certification processes, tokenization is a securities protocol grounded in math and data security. What took hours before now takes only a few minutes with automated token generation and identity verification. Instant settlements, multiple payment options, fewer intermediaries, and lower transaction costs all bring immense value in both savings and transparency to the CRE investor.

Tokenized investing on the blockchain also provides the opportunities to use smart contracts, so many items in your workflow can be customized and automated for the convenience of everyone involved.

Tokenization can be used for:
● Authenticated data
● Digital securities and loan origination
● Automated KYC and AML data collection and audits
● Automatic servicing and distribution management
● Automated Cap Table management
● LP consensus management
● Automated funds control
● Automated transfer
● Integration with the public or partners with sophisticated APIs

Implementing tokenization in commercial real estate

When looking to implement tokenization into your operations, choosing the right platform is only a piece of the puzzle. You will need to review how you will structure your assets and investments. Some example considerations include:

● Asset types and income distribution
● Asset locations and applicable property protection laws
● Tokenization ratios in case of split properties
● Pre-existing mortgages
● AML/KYC and due diligence compliance
● International sales
● Taxation requirements

You’ll also want to be able to customize your smart contracts if you choose to use them. To set up an effective contract, you’ll need to map out your token distribution and the timing of distribution.

Suppose your platform does not have a library of proven templates or customer support for smart contracts. In that case, you may need to onboard or train a professional to review the technical aspects of your agreement before using it.

Transforming your operations with tokenized real estate

The future for CRE financing is bright, made more resilient and secure through advanced cryptography like tokenization and blockchain. Not only is tokenization useful for protecting data, but it reduces costs significantly and is far more transparent than manual certificates.

For investors looking for a competitive advantage, transforming your operations to include a tokenized commercial real estate platform is essential for growth and long-term savings.

Want to learn more about implementing blockchain technology into your workflow? You can start today .

Want to see if Earn.re is the right platform for you?