By Novum Capital
In 2018, the world has witnessed the first Security Token Offering (STO) in history, St. Regis Aspen Luxury Real-Estate Security Token Offerings, closed for $18 Million. This has given the world a small glimpse into the massive disruption about to take place in the real estate sector as well as financial industry. The future of real estate investing is (believed to be) the one that provides global exposure, transparency, public access and liquidity, all of which are elements that can be delivered through blockchain technology and the adoption of STO.
So, what is STO and how will it disrupt the real estate market?
According to a report by Inwara.com, STO is defined as:
“Financial security issued as a digital asset; which generally represent proprietary rights in an underlying company and/or its assets. This is distinctly different from the aforementioned ICOs, which were “utility tokens” or digital tokens giving access to the future product/service of a project with no real right to an asset or equity interest”
Advantages and Disadvantages of STO
Some of the most significant benefits of STO can be named out as Cost-effective, Time-saving transaction, 24/7 global trading capability and high-security level empowered by underlying assets and regulations.
However, regulation is the most concerned factors that could stifle the mass adoption of security tokens. Since STOs operate within the securities law, currently, only accredited investors and institutions have access to the market. Due to the nature of complex regulatory environments, the US is currently in the lead for total STOs in the market, with Switzerland taking the second spot.
The rise of STO — the future of fundraising
2017 marked the bloom of ICO while 2018 was the year of regulatory uncertainty around this fundraising method. While ICOs have helped lots of startups raise a great deal of money, this fundraising method also paved the way for a variety of scams as there were little or no regulations involved. Many investors have lost a lot of money due to abandoned projects and false promises. Therefore, the US Securities and Exchange Commission (SEC) has been working on the regulatory framework to tackle fraudulent and noncompliant ICOs, with the aim of defining and enforcing industry standards. Thus, the next big thing expected in 2019 and beyond is STOs (Security Token Offerings), as they can make securities more transparent, transferable, and secure on the blockchain.
According to a statistic from InWara’s STO database, October 2018 has seen the most number of STOs than ever before. What most noticeable is that the shift from ICOs to STOs is largely driven by the recent bottoming of the retail market (both Bitcoin and Ethereum) and softening demand from retail investors for ICOs.
Security token adoption continues to rise as the integration of regulations enables for more inclusion on the blockchain. While security tokens that function as rights to ownership in company profits, there is one asset class that looks ripe for tokenization — real estate.
Number of STO by Categories
Investments and Trading takes the lead with the most number of STOs so far, contributing to over 20% of total STOs. Financial Services leads the pack in ICOs numbers but for STOs, the sector takes a step back. Noticeably, the Real Estate sector, though had accounted for an insignificant number of funds in ICOs through the previous years, ranked as high as fourth in terms of number of STOs in 2018. In fact, this is not a surprising number since Real Estate has been predicted (and expected) to be one of the sectors facing disruption from the rise of STOs and blockchain technology.
The first successful STO in 2018, Aspen Coin, has given the world a convincing proof that Real Estate is perfect for tokenization because of its security and stability but also for its almost comical inefficient and illiquid nature. Blockchain technology embraces the upside of real estate investment, at the same time, eliminates the inefficiencies and constraints in the traditional Real Estate market.
To understand the reasons lying behind the prediction that STO will disrupt the traditional real estate market with its innovations, may we take a closer look at the current market.
It is undeniable that Real Estate has always been the largest asset class. Real Estate investment is a market full of potentials but has not yet been disrupted by technologies. One of the biggest flaws in the Real Estate market is the lack of accessibility and liquidity.
Low growth and high barriers-to-entry
Let’s take the U.S. market as an example: Despite the fact that U.S. real estate has always been one of the most stable and desirable asset classes in the world, international investors could not access these investment opportunities easily and conveniently. Currently, the only tradable real estate assets are Real Estate Investment Trusts (REITs), and ETFs of REITs. However, REITs generally exhibit low growth: since they must pay 90% of income back to investors and only 10% of income can be reinvested into the business. Real estate investing platforms restrict investments to accredited investors only (of which the accreditation itself is a lengthy process), and Real Estate Investment Trust (REIT) funds have high fees and require investors to have access to stock-trading accounts.Now, it’s time for tokenization and STO to do their work: to change the way traditional real estate market operates.
What changes should we expect when STO revolutionises the real estate market?
Besides benefits from tokenizing real estate assets that have been mentioned in the previous article, STO can bring into the market some specific advantages.
Reducing frauds and rental scams in real estate sector. Since STO is compliant with security laws, it can eliminate fundraising frauds that happened with ICOs. Blockchain Technology and the smart contracts behind STOs make selling or advertising properties you don’t own impossible. On a blockchain-empowered platform, once the sender and recipient of funds are logged, the “digital ownership certificates” for properties are saved and these codes are incorruptible and irreversible. There are almost no chances you can replicate “digital ownership certificates” or fake transactions as blockchain allows for zero data manipulation.
Disintermediation, which means Cost-effective and Time-saving transactions. Smart contracts can replace the middlemen and escrow companies in making transactions. By using a blockchain distributed database to prove authenticity, homeowners could legitimately transfer ownership immediately without the need to pay for third-party verification.
Transparency and Liquidity. STO Real Estate Platforms, unlike traditional Real Estate assets trading methods, offer a decentralized 24/7 market where every investor can trade their real estate ownership safely and quickly. When transactions are performed quickly, it allows for investors to have liquidity and ability to diversify their investments.
STO is believed to be the future of fundraising and tokenization is becoming the future of the Real Estate market. It is inevitable that blockchain technology is coming to revolutionize the traditional real estate market, empowering the market with transparency and liquidity, offering everyone the opportunity to enjoy the benefits from the largest asset class in the world.
It’s time to keep an eye on Real Estate STO projects.