Technological developments such as tokens based on smart contracts and blockchains could soon be making markets such as real estate more easily accessible, more liquid and less expensive to invest in. How? By removing the middlemen and automating many of the costly and time-consuming functions they used to perform.
In a recent article for an online magazine I used the fictitious example of a farming couple in Aargau to explain how technologies like blockchain are revolutionising the way supply chains operate. These farmers have adopted state-of-the-art blockchain applications to market their premium organic carrots efficiently and cost-effectively. If you need some background, you might like to check out the article for yourself: Ecosystems converge: what your carrot’s journey from field to fork (and beyond) can tell us about the future of sustainability.
To briefly recap: farmers Ingrid and Martin Wälti specialise in premium organic carrots. To earn this premium they have to demonstrate a number of things − that their crop really is what it claims to be (Swiss organic); that it arrives fresh and won’t spoil after only a few days; and that it’s transported in a way that keeps the environmental impact to a minimum. To achieve this credibility, the Wältis have adopted blockchain technology allowing their produce to be tracked from the farm to the supermarket shelves. The system enables everyone from seed growers and producers to certifiers and consumers to input or access information on the produce (right down to individual packages), where and how it was grown, and how it was transported – simply, cheaply and on a trustworthy and automated basis.
Let’s now add a short chapter to the Wältis’ story to illustrate another development in crypto-technology that could revolutionise financial life not just for businesses, but for private individuals as well: the tokenisation of assets. Allow me to introduce Ingrid Wälti’s cousin, Georg Jenni. Georg also farms – not in Aargau, but in the Swiss Three-Lakes region. For generations his family has been growing vegetables on one of the biggest properties in the area. His legacy includes a complex of disused buildings on the edge of the farm. Georg wants to put these buildings to profitable use. They’re worth multiple millions and in good shape, so demolition would be a waste. His idea is to convert them into a vegetable processing plant for use by Georg himself and local farmers, who would gain extra independence and crisis-resistance by taking charge of this part of the supply chain.
All Georg now has to do is figure out how to free up the several million tied up in the real estate so that he can fit out the plant. He talks about it to Ingrid and Martin. They suggest capitalising on his real estate assets by tokenising them.
Tokenisation involves creating cryptographic tokens to represent an asset (in this case the farm buildings). These tokens are broken down into easily affordable fragments and sold to investors in a public sale called a security token offering (STO).
The token is managed by a smart contract and an underlying distributed ledger (the blockchain). Unlike a traditional contract, the smart contract contains all the terms of the agreement in digital, programmed form. If the terms are met (for example once a payment enters the account or the asset produces rental income), the corresponding action (e.g. the issue of tokens or the payment of income) is triggered automatically. No one has to keep track of whether the terms are being complied with: it’s all done autonomously, so it’s much cheaper, reliable and transparent than the analogue contract approach.
Georg loves the idea of tokenisation. He can basically use it to crowdfund his project, avoiding the need to dispose of the property in one piece or borrow money from the bank to buy the equipment for his processing plant. Using tokens he can sell off ownership – including rights to the rental income the property will generate – to a large number of investors. A large, idle, illiquid asset is suddenly useful and productive.
Tokenisation of this sort is no fantasy: it’s already being done in this part of the world, and digital exchanges are emerging in Zurich and Stuttgart to make issuing and dealing in tokens easier and available to members of the public. It’s not just limited to real estate: you can also tokenise a work of art or any other asset as a straightforward and inexpensive way of freeing up cash. The technology and infrastructure are there. All that’s needed is imagination.
Georg has already got the ball rolling. A full digital description of his real estate has been created and put on the blockchain, the STO is under way, and the tokens are selling well. Georg himself has bought some, as have his cousin and a number of local vegetable growers. It won’t be long before the processing plant is up and running, adding new value to the local economy, and ensuring that delicious Seeland vegetables are reaching customers as fresh as the day they were picked.