A growing number of developers are turning to blockchain-based investment vehicles to unlock new pools of capital, but critics warn the new financing model may attract bad actors who could dupe novice investors out of their money.
More than 10,000 investors hold more than $356M in digitized tokens backed by 57 real estate assets in 10 countries, according to the tokenized real-world asset tracker RWA.xyz.
And a lot more money is expected to flow into digitized investment vehicles. The Deloitte Center for Financial Services predicts that $4T of real estate will be tokenized by 2035, up from $300B in 2024. Deloitte analysts say fractionalized digital ownership has the potential to expand the investor pool for commercial real estate.
Digitized tokens can mean a lot of things, from meme coins to currency-pegged stablecoins. Such tokens may be regulated or unregulated, and they may or may not be backed by real-world assets.
Adam Gower, a crowdfunding consultant to the real estate industry, urges investors to apply the same level of caution toward tokenized investment in commercial real estate that they did when crowdfunding first came into vogue. If something sounds too good to be true with a tokenized investment, it probably is, he said.
“This is the Wild West, this stuff,” Gower said. “Crowdfunding was considered the Wild West when it first started. Any new industry is going to draw your conmen and charlatans.”
Some unscrupulous developers may use tokenization language to hype up projects, Gower said.
“It’s just these platitudes that they pump out and sell,” he said. “Tokenization is just a different tech for it.”
Roza Akopyan, the head of finance for Tokenland, a digital investment firm that wants to raise $10M in tokens to invest in new multifamily properties, has seen this in the digitized tokenization space. Developers will cloak mediocre-at-best investments in crypto language to make those investments sound more valuable than they are, she said.
The value of the underlying investment still determines whether investors will see returns, Akopyan said.
“I see a lot of platforms just tokenizing random houses, just some beat-up houses,” she said. “They do get the money, but then what if the asset already doesn’t really represent anything? It’s not wanted, and it’s hard to rent.”
High rollers with deep pockets are utilizing blockchain-based investment vehicles to fund their developments globally. Dar Global and The Trump Organization announced in November that they would offer tokenized investment to raise capital for Trump International Hotel Maldives, a development of 80 ultra-luxury beach and overwater villas set to open in 2028.
Proponents of this investment option say it can give smaller investors the chance to take a small stake in big deals that were once the domain of family offices and institutional investors. It may be the perfect use case for digitized investment, Phil Larmon, vice president of DigiShares, a tokenization platform for real-world assets, said during a Feb. 10 webinar the company hosted.
“Real estate is obviously the low-hanging fruit,” Larmon said. “I think real estate, by far, is the most conversations I’m having.”
And tokenization of real estate deals can reduce the cost and time it takes to do the paperwork for transactions. This can create a marketplace for real-time trading, said Andy Lowenthal, co-founder of TokenShare.io. Such rapid liquidity could help tokenization become the dominant way assets will be traded in the near term, Lowenthal said.
“You buy X percent of a hotel by purchasing a token, and you wake up the next day, you wish you hadn’t done it, or your daughter is getting married and you need money — you now have the ability to go on an exchange and sell your token,” he said.
But while the rapidity and fractional nature of blockchain technology may attract a larger pool of investors, that pool will include novices at greater risk of being taken in by shady investments, said Ian Ippolito, an independent real estate investor and writer of the blog The Real Estate Crowdfunding Review.
“The concerns about crowdfunding are just magnified when you make the amounts smaller,” Ippolito said. “Now they’re targeting even less sophisticated investors.”
And there is no technology to fully protect investors from bad actors or bad bets, said Jason Barraza, an institutional business developer for the online blockchain provider RedStone.
RealT, a real estate tokenization platform, faces lawsuits for reportedly raising more than $2.6M in tokenized investment for dozens of Detroit rental properties it didn’t own at the time of the sale, according to public records.
“In the tokenization space, it’s the same securities laws that apply, right? Fraud is fraud,” Barraza said.
And no investment is immune to the ups and downs of the marketplace. The cryptocurrency market experienced something of a freefall this month, with big names like bitcoin shedding billions of dollars in value. This forced Chicago-based crypto lender BlockFills to halt customer withdrawals from its platform, the Financial Times reported Feb. 11.
Some in digitized investment circles hope stronger regulation will smooth out the more severe roller coaster dips of the marketplace and encourage institutional investors to flow capital into blockchain-based investments.
The Digital Asset Market Clarity Act before Congress would establish a comprehensive regulatory framework for future token investment, they say, but its progress has stalled. Lawmakers have been fighting over amendments to the bill, and banks and crypto firms are at odds over some of its key provisions, Coinpaper reported.
Lowenthal said the bill’s passage is important to the digitized investment industry and would go a long way to creating confidence in it.
“The more regulation, the better,” he said. “We are actually fans of more regulation because it provides a better set of safety guardrails for this industry.”
No amount of regulation will protect investors from all risk, he said. The only way investors can protect themselves with this new capital market class is to use the same skepticism they use with nonblockchain investment.
“Do your own due diligence if they don’t have a track record, just like with any other investment,” Lowenthal said.
