The tokenization of assets as a safe haven investment: what is it and what is it for

1. INTRODUCTION

Ever since the concept of money as a unit of account was created, it has always been based on the three pillars of the concept:

• Unit of account: as a unit of value between assets, matter in kind, or simply as a simplified accounting factor.
• Liquid factor: that is, value recognized by all parties and easy conversion to another asset, or product.
• Shelter value or savings: allow accumulation in a temporary space while preserving its original value.

These three pillars have been suffering minor tremors motivated by international circumstances, which have given rise to questions that are not easy to answer:

If cash (monetary money) loses value for a majority, does it stop being money?

How to beat inflation and thus guarantee any savings?

What long-term strategy do banks propose to prevent the fall in the value of money? Why are they demanding the printing of more money, if so? against of the interests of their patrons?

2. INVESTMENT IS NEITHER CREATED NOR DESTROYED, IT IS TRANSFORMED

If we take as a reference the aggregate demand, we can see how savings by families and investment by companies leave gaps in nomenclature, such as investment by families or savings by companies.

Both have the objective of maintaining at least the value of what is generated today, at least in a short period of time, but with much more sense, in the long term.

It is clear that in Spain, real estate investment is very widespread, and this investment is perceived as a safe haven and even as an asset that not only accumulates value but is properly managed and generates annual income.

East Boom investment led to a major movement in the construction sector for many years, being one of the engines of the national economy and even the focus of international investors.

The banking sector opted for a reduction in interest rates (since 1994 the change in the interest rate curve originated), creating a change in investment mentality and encouraging long-term investment (change in taxation in 2003 and 2007).

In graph 1, we can see the change in curve in 1994, which gave way to the influx of foreign capital later. Focusing on longer-term investments.

In 2007-2009, this favorable trend marked a stampede of investments in the stock market, to the detriment of investments in real estate assets, either in off-plan purchases to speculate on revaluation at the time the keys were handed over, or more in the longer term. It was a very sweet moment, everything was being bought, everything was being sold, prices were rising, and everything was subject to bank financing. But...

... Any investment not limited to time is an empty expense. And any unused savings is a negative investment.

Real estate investment is a long-term strategy, which, depending on the investor's profile, must be accompanied by a medium and short-term strategy. Having a second and third home can be unsustainable in many cases and cause personal bankruptcy in as many others.

The biggest risk associated with investing in real estate assets is that you must leave a high initial capital withheld in the face of a low one-time return in case of resale or annual in case of rental.

Famous phrases were made such as, “You have mortgaged your work life”, “I married the bank”, and many others.

Looking at the graph above, we accept the fact that we dedicate at least 1/3 of our salary to paying for housing. Assuming that housing would continue to rise without losing value, and that our work would also be the main source of income or savings for a long time.

We can also see how an investment in real estate performed compared to the investment in the Spanish bond. (Always understanding the purchase of a home as an investment element not as a basic necessity).

In the previous graph, we observed that the 10-year reference of 3.8% is the investment reference to be taken into account. Values that are very easy to overcome through a value proposition focused on tokenization.

In the next post, I will go into more detail about the possibilities and opportunities of this market, the current point, and how tokenization leverages the traditional opportunity to the new demands of investors and users.

3. But where are we now in 2020?

The need for investment today and after COVD has not disappeared, in other words, families and companies continue to generate value, savings and benefits. What's more, those investments or deposits are in a process of optimization and the search for new and better returns. So, why not address the Friction point of real estate investments:

• High capital: small investors cannot access investment.
• The obligation to maintain the investment in the long term.
• Taxes and other expenses derived from the purchase and sale.
• The waiting time between buying and selling. (very low liquidity).

But at the same time, keep the Opportunity points of investment in real estate assets.

• The guarantee of a physical asset.
• The reduced volatility in the event of a fall in the price of the real estate market.
• Business opportunities in consolidated urban land.

4. So.., how to unite supply and demand?

Since the introduction of blockchain as an element of social change and the transfer of digital value, it has been called the Internet of value, many possibilities have been opened up and the entry conditions for new players have been flattened and reduced. Blockchain is allowing:

• Reduce commissions for buying and selling digital assets
• Transparency and trust between the parties.
• Transaction speed.
• Entry to micro investments.

But in this post, I don't want to dwell on generic terms or on global improvement points, but rather to focus on what tokenization involves and the impact on the individual.

Tokenization is the digitization or virtualization of the value of a physical asset, based on the fact that the asset has a real value and that someone would always be willing to pay for themselves.

This part is perhaps the most subtle, but the most important, Value for a third party, for example, Dalí probably didn't give value to them in his first sketches, but a third certainly did and would pay for them. And today, much more (evolution of the asset price).

5. Tokenizing the real value

What can you tokenize? Anything that has value to a third party, and at this point, tokenizing something as physical as a home or property, is perhaps the easiest transition to make between the crypto world and the traditional world. Because it is something tangible, in which a large percentage of people have accepted and accept it as a safe investment.

However, there are still many limitations at the legal level on the transfer of a non-digital value to 100% digital, especially if we fall into the classification of utilities, securities, etc. Since even if technology is several years ahead of regulation, it must take more conservative forms and meet minimum requirements to be able to be disseminated and marketed.

The first valid approach is the tokenization of the rights to the real estate asset, in such a way that, since physical transmission through the land registry is not yet possible, if everything that is digitized represents that asset: in rights, income or value it provides.

Thus, real estate would be represented by a specific number of tokens, which represent the real right to it: right to rent, right to transfer, etc. Right now this type of tokenization cannot be elevated to a public decree, since they request that the right be real and existing.

But if we look at the value of a real estate asset for an investor, it focuses on two parameters: capital gain of the value in case of sale and Rent for rent. The rest of the features are irrelevant to him.

In such a way, the token, in simple words, is an automated contract, where the issuer of the tokens undertakes to pay the capital gains generated by the property or/and the rental income. Obviously, this contract stipulates that the property is for assignment or exclusive use for this purpose.

This whole process has an unprecedented speed, if you work on crypto directly. But it doesn't exclude doing the conversion process to Fiat. So every investor, whether crypto or not, is likely to enter.

In the next post, I will go into more detail about the possibilities and opportunities of this market, which, while being very traditional, must adapt to the new requirements of investors and users.

We will talk about the barriers to entry to foreign investment within a country, the need to access new small investors, the liquidity of a sector that accumulates a lot of value,... etc.

6. Why do we differentiate investment from savings?

To conclude this group of posts, I would like to clarify the concept of investment or savings. Culturally, they are opposite terms, both in the concept of term (savings are in the medium-long term), in lucrative terms (savings have a low lucrative expectation) and in terms of risk (savings are something that maintains its value with completely zero risk).

Culturally, the term to save has been to store money or monetary units in a current account, with the possibility of immediate liquidity, that is, usable or transferable in just minutes. It is an attitude that stems from the fear of having to face any unforeseen event. But is it completely safe to have money in a bank account? Are you protected from risks such as inflation, currency depreciation, or simply from cyberattacks and criminal use?

This term may be a bold one, but creating value to generate savings is to passively lose it. Or in other words, to save is to invest inefficiently.

Returning to the traditional term savings, in Spain it was common to save on pension funds and real estate assets as a reference for low long-term risk. Therefore, based on the security and profitability of a real estate asset (chosen consistently), and using tokenization as a reliable representation of that property and its remuneration rights, we could have a more efficient saving/investment vehicle. And why more efficient? Because it allows it to be much more liquid than a traditional real estate asset, which makes it an investment both in the short and long term.

Why is liquidity increasing?

Very simple: since it represents the investment of the property in tokens and these remain included in a decentralized liquidity pool, the price of the token is conditioned not only by the value derived from the rental or sale rights, but also by the price or value that third parties give to it (that is, subject to supply and demand). This causes a constant and real flow of liquidity, verifiable and accessible to anyone in the world (after validation in Whitelist).

What properties can be tokenized?

Really anyone, but anyone that has value to a third party. This point is interesting because it causes investment using tokenization to deviate from the trend of speculation to focus on a lower but continuous return value over time.

On the other hand, it opens the door to tokenizing properties located anywhere, as long as they have representative value and your ownership can be reliably justified. And finally, anyone on the other side of the world could invest in a property located in Spain. Could you buy a property in another part of the world with the ease of a click, without being tokenized?

It is pure disruption, placing the small investor at the center of all this movement. It's a time for change.

Note: From Reental and Tutellus we always recommend training in Blockchain and finance as a complement to your investment culture.