Crypto Tech Can Work in CRE, but a Full Solution Takes Effort

Over the last few years, there’s been growing interest in applying blockchain technology and tokenization to commercial real estate. In theory, tokenization, combined with fractional ownership structures, would allow companies to sell interests to investors of all sizes, expanding markets and unlocking additional value. Distributed ledger technology could automate the process, making activities efficient enough for significant market adoption.

But the distance between realizing the vision and making it happen is more complex than clicking your heels together and saying, “There’s no place like crypto.”

“One of the things about real estate that makes it interesting here is that it’s traditionally an investable asset class, but it’s difficult for individuals to do,” Scott Shechtman, head of new markets at Nasdaq’s market technology business unit, tells GlobeSt.com. “A major steppingstone is the launch of secondary markets for individual properties. It’s the stage of the journey the real estate industry is at. You’re seeing a range of ventures that are looking at taking individual properties, whether residential or commercial, and fractionalizing them for trading.”

Nasdaq has technology to run secondary markets, with such fractionalized real estate exchanges as Lex Markets in the U.S. and IPSX in the U.K. But the company’s role is selective.

“We are facilitating the secondary market behind the scenes,” Shechtman says. “Someone else has solved the problems of fractionalizing the assets, doing the paperwork, and all that. That’s their specialty. Once they’ve fractionalized, those become instruments that can trade on our technology. We’re much more well positioned to provide a generic secondary market.”

When it comes to who can trade or sign up, regulations, and the like, the specifics get too complex. “We stay far, far from that, otherwise we wouldn’t be able to work in scale,” Shechtman says.

In other words, the focus is on the automation of a specific part of the workflow, with blockchain capabilities like so-called smart contracts—software programs that run under specific pre-defined conditions and perform actions like triggering payment transfers at the appropriate time.

Trust in those providing and running the mechanisms like smart contracts would be critical. “When people are trying to create marketplaces in new areas, they cannot emphasize enough how important it is to have trust in a marketplace,” says Shechtman. One aspect that Nasdaq emphasizes is spotting manipulative trading patterns to end fraud before it can gain traction.

Once the fractionalization is done and a trusted mechanism for secondary markets in place, wider availability, and a greater level of opportunity discovery by investors should open markets.