How to Integrate Tokenization Into an Existing Real Estate Business
The adoption of tokenization in real estate has been growing as a means to digitize property ownership and develop new investment opportunities, attracting a wider audience of investors. However, the implementation of tokenization doesn't entail complete eradication of current structures or a complete rebuild of the business.
The true challenge is integration, identifying how to integrate tokenization into the existing business model, which processes will need to shift, and how available technology and operations can match up with the newly introduced tokenization infrastructure.
A pragmatic way of doing this for real estate firms, developers, asset managers, or platforms is to view tokenization as an extra digital layer to fold into the route of business over time.
What Does Tokenization Add to a Real Estate Business?
Real estate tokenization is the process of converting the right to own or own an economic stake in a real estate asset or an existing or newly constructed asset into a token that can be issued in accordance with state and federal laws and regulations that govern transactions in tokenized assets.
In the field of real estate, it can create novel investment structures and strategies.In the real estate sector, it can lead to new investment strategies and structures. For different types of businesses and in different regions, tokenization can enable digital ownership records, automatic processes, and easier investor management, among other things.
But, tokenization is not just about the blockchains.
To create a successful model several functions must be included, such as:
- Property and asset management
- Legal and financial structuring
- Investor onboarding
- KYC and AML processes
- Payments and distributions
- Ownership or investment records
- Reporting and compliance
- Technology infrastructure
This is why integration should be considered from both a business and technology perspective.
Where Does Tokenization Fit Into the Existing Workflow?
There are already processes understood in most real estate businesses for acquisition, management, financing and reporting on real estate.
A standard investment process could be:
Property Acquisition → Legal Structuring → Investor Fundraising → Investment → Asset Management → Returns → Reporting
Tokenization introduces an additional digital layer:
Property Acquisition → Legal Structuring → Tokenization → Investor Onboarding → Token Distribution → Asset Management → Reporting
The underlying property operations can continue as before. Property managers can still deal with the physical property, business or finance accountants can still manage the financial documents, and legal teams can keep playing their part in managing the legal documentation.
The tokenization infrastructure facilitates integration with the current processes and the investment and ownership layer.
This can help minimize disruption and ease adoption.
Which Parts of the Business Need to Change?
It is not enough to transform all departments, there are a number of areas that need careful planning.
Legal and Compliance
The first question is, what does the token represent?
The businesses should decide on the legal rights of the token, ownership or economic interests of the token, who could invest in the token, and what are the regulatory aspects of the token.
Depending on the specific jurisdiction and entity, there can be processes established in investor eligibility, KYC, AML, transfer restrictions, disclosures, and continuous compliance.
The implementation of the technology of tokens should therefore be accompanied by an adequate legal and compliance system, rather than replacing it all together.
Technology
Technology is another huge factor to take into account.
The components of a tokenization ecosystem could include the use of smart contracts, investor portals, wallets or custody services, payment systems, APIs, databases, reporting tools, and more.
Replacement of an entire technology system is not needed as an objective. Rather, companies need to recognize those systems that are already successful and figure out how the systems that tokenize can integrate themselves into these successful systems.
Operations
The tokenization also affects some other operational aspects.
New work flows may be needed for investor onboarding, token issuance, transfers, distributions, reporting and investor communications.Investor on boarding, token issuing, transferring, distributions, reporting and investor communications may need new workflows.
Prior to implementing, the company should create a process map to identify opportunities for improving the process with automation or integration, thereby eliminating manual efforts.
What Existing Systems Can Be Kept?
The biggest myth surrounding the tokenization is that companies have to change their current technology stack.
Many times, the current CRM, accounting, property management, payment systems and investor management systems will keep serving their respective functions.
The key is integration.
The APIs or other protocols for integration can enable the tokenization infrastructure to interact with the current systems. Investor information can require transferring from an investor-management system to a tokenization platform, and transaction and distribution information can require integration with accounting systems, for instance.
This creates a more practical architecture:
Existing Business Systems + Tokenization Infrastructure + Integration Layer
Instead of building an entirely new company that is built from scratch as a blockchain entity, one could incorporate tokenization into processes that companies already know.
Build In-House or Use White-Label Infrastructure?
A crucial move for businesses making their debut with tokenization.
Having a whole platform created in-house gives great control and customization. It requires significant blockchain development skills, security measures, infrastructure, maintenance efforts, and investment as well, though.
Companies seeking quicker launch times or those not wanting to manage all the technical aspects can opt for a white-label real estate tokenization platform development as an alternative.
Businesses can benefit from using pre-existing tokenization infrastructure for a white label approach, tailored to their brand and business model. This can come as part of the provider's functionality and include features like token issuance, investor management, compliance workflows, dashboards and integrations.
The choice ultimately depends on factors such as:
- Required customization
- Internal technical expertise
- Budget
- Time to market
- Scalability requirements
- Compliance requirements
- Long-term technology strategy
A Step-by-Step Approach to Integration
1. Define the Business Objective
If a business is considering implementing tokenization, the first step is to determine the business's reasons for doing so.
The goal could be a new digital investment product, a scalable tokenized asset platform, enhanced investor access or the establishment of fractional investment opportunities.
Having a clear objective will aid in determining technology requirements and operational requirements.
2. Identify Suitable Assets
Not all properties have to be tokenized.
Businesses must consider the requirements including ownership, investment amount, investor demand, expected returns, acquisition method and law restrictions before today's properties were evaluated for the investment.
Having a firm understanding of the asset's beginning point helps implementing a project.
3. Establish the Legal and Compliance Structure
Understand legal or regulatory structure and requirements before starting to issue tokens.
This could include investor rights, transfer limitations, know-your-customer and anti-money laundering protocols, disclosures, and other requirements.
4. Map Existing Processes
Describe the existing process of acquisition, investor management and reporting.
Next determine the locations for the introduction of tokenization.
This can save businesses from unnecessary duplication, and expose those that require integration.
5. Select the Technology Approach
There are three general strategies for businesses to consider:
Build: Invest in its own facilities.
Buy or white-label: Use an existing tokenization platform and customize it for the business.
Hybrid: Integrate proprietary with 3rd party tokenization systems.
The solution is different according to the company resources and objectives.
6. Start With a Pilot
Businesses don't necessarily have to approach the tokenization of a portfolio with one fell swoop, but can start with just one property or with what we call an "investment offering".
During this initial period, a pilot enables the company to put investor onboarding, compliance, tech integrations, reporting, and processes into practice before expanding.
7. Measure and Scale
After the pilot is implemented, companies will be able to assess the performance and find out how to enhance it.
This can involve time to onboard investors, transaction volume and usage of the platform, as well as cost and administrative workload.
If a successful process could be applied to other properties, then that may be possible.
Conclusion
You don't have to start fresh with a real estate business by implementing tokenization.
It is better, however, to evaluate the current operations, determine where the tokenization value-add lies, implement the appropriate technology, conduct a pilot test and then scale it up gradually.
Another way to implement a blockchain may be for businesses that have limited internal resources to use a white-label infrastructure, which does not require the creation of all the components.
The end goal isn't just to tokenize a property. It is to define a repeatable, scalable business process in which the functionality of tokenization can coexist with real estate business as a part of the long-term investing strategy of the company.
