What is real estate tokenization, investments in the digital world?

The tokenization process has started to be actively implemented in the Spanish real estate market. Last year, a real estate company sold tokens for several houses in the Valencia community, and local media, such as La Voz de Galicia, reported on the sale of tokenized apartments in Vigo as well. But what is real estate tokenization? What does a token represent? Let's start from the beginning.

Token

A token is a virtual currency or digital medium of exchange that uses cryptography to secure transactions, control the creation of additional units, and verify the transfer of assets using decentralized ledger technologies. A token is issued by a private entity on a blockchain (for example, based on Bitcoin) and serves to provide digital value to a product or service.

Tokenization

Tokenization is the process of digitally representing a value or right, such as ownership of real estate, and integrating it into a blockchain in the form of tokens.

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Tokenization enables the creation of liquid markets where they were previously illiquid, allowing for numerous daily transactions without paperwork, bureaucracy, or the need to go through a notary.

Disadvantages and regulation

As Javier Pascual, blockchain expert and ALEDRA partner, points out, one of the drawbacks of tokenization is the lack of security due to the fact that blockchain technology is in its early days and institutions do not yet control or regulate this area. While there is no legal regulation for tokens yet, there are sectoral regulations that recognize tokens as a method of transaction.

Development in Spain

In Spain, there are projects with legal protection that use tokenization technology for real estate investments. The European Commission adopted a regulation in May 2022 aimed at creating a controlled environment for experimenting with decentralized ledger technologies in financial market infrastructure. At the Spanish level, this will be monitored by the Securities and Exchange Commission.

Tokenization of assets

Tokenization of assets means converting the right to a physical asset into a token, which is then sold on the market at a certain price. The token does not represent a share of ownership in the property.