NFTS have been gaining ground in use cases for tracking and carrying out activities related to ownership of both tangible and intangible assets.

But a study from researchers at the University of Iowa and Widener University argue NFTs make more sense for intangible, or digital assets, than for applications like real estate.

Is that assessment accurate?

In “NFTs, Property Rights, and Realty,” the authors argue that though blockchain technologies claim to offer innovations that could apply to managing tangible assets including real property, the “paper based record system” that prevails in the U.S. remains adequate for the purposes of establishing and tracking ownership and transfers of property, and forming a basis for economic activity surrounding real estate:

“But we’re incredulous as to these claims. While many aspects of the existing land recording system are old and, at least in many parts of the country, are still paper based, not all components are bad. Indeed, for all its inefficiency, land transactions abound in the US—and have done so even during the COVID-19 pandemic.15 In other words, for all its flaws and ripe old age, the U.S. land recording system seems to be working quite fine.”

Anyone who’s dealt with issues of title searches, deeds, liens and time and cost of navigating the real estate paper record based system might differ with the assessment that the current system couldn’t use improvement.

The authors of the study go to a more interesting, but equally debatable point surrounding the current real estate system, versus what decentralized blockchains and tokenized assets operating in a trustless and transparent system might offer.

They rightly conclude that moving to blockchain technologies including tokenized assets and NFTs would mean shifting authority, power and proceeds from the existing “political economy”:

“But putting aside the legal obstacles, there are also systemic barriers—some of which are bound up in basic political economy. First, to change the system of recording from the way it is now to one that involves a blockchain as contemporarily conceived would be expensive and would present issues of public trust, as it would seem to require the introduction of private firms as central nodes in the system to substitute for accountable government officials.”

In fact, it’s a given that only “private firms” would have to play a central role as “nodes.” Public entities could choose to move to blockchain technologies for various aspects of managing real property tracking and ownership.

The study itself notes that several states have experimented with doing just that, although it pronounces that efforts so far have “come to nothing.”

The study also neglects to mention the roles that DAOs (Decentralized Autonomous Organizations) might take. DAOs are typically open to anyone interested in participating in a given project.

The study assesses three areas where crypto BFT based technologies have sought to design solutions that might improv on existing real estate processes:

• Land Transfers by NFT
• Crypto Enabled Loans
• Moving Recording to the Blockchain

It delves into the subject of fractionalized ownership of properties via NFTs, which allows small investors a relatively novel way to get in on commercial investments, and receive returns in a transparent and automated way to the crypto wallet holding the NFT.

It relates examples involving the Propy and RealT platforms, which offer investors the chance to buy fractionalized, tokenized interests in rental properties.

But it largely misses the import of fractionalized, automated investing innovations.

Speaking about RealT, it assesses:

“As is the case in Propy’s structure, the tokens do not actually represent interests in real estate; the tokens represent interests in a business entity. RealT has structured its entity as a Delaware Series LLC, and each series owns one real property asset. Each deed evidencing the transfer of the real estate to the series is recorded in the county in which the real estate is located. Investors then buy tokens, known as Real Tokens, that represent units of the series. One benefit of the token structure is the mechanism for disbursing rental payments. The management company collects rent from the tenants and exchanges the rent for stablecoins which are then distributed to the rent contract associated with each property. The rent contract then automatically disburses the rental payments, pro rata, to the digital wallets that hold the Real Tokens.”

The study acknowledges that a RealT white paper available on the company’s web site “gives a balanced view of the pros and cons of tokenized real estate ownership, recognizing, for example, that while a homeowner might tokenize her house on the RealT platform, the possibility of using that token as collateral for a loan is ‘purely hypothetical.’”

It shouldn’t be surprising that the newness of tokenizing real world assets presents issues of the kind mentioned. Investors should always research the details concerning tokenization of assets, whether of a business entity, or direct property, which is more straightforward in the case of digital assets such as an artwork, digital book, video or a recording artist’s song.

The study notes other factors they say will impede tokenization of real world assets, including “impediments” in current laws, which would need overhauls to accommodate crypto innovations.

But that’s hardly an argument against the technology itself.

The Future of Asset Tokenization 

Despite obstacles mentioned in the study, it seems premature at this stage to conclude that NFTs and tokenization are unlikely to show utility and achieve greater use for tracking and managing real world assets.

An alternate view was voiced rather emphatically in a recent report by world leading consulting firm BCG, co-authored with digital exchange ADDX. It predicted that asset tokenization could grow into a US$16.1 trillion market potential by 2030.

Their report forecast that tokenization of assets would ramp up as a result of increased investor demand for access to private markets, and it mentioned fractionalization and related factors as a major innovation that would drive that growth.

On platforms like ADDX, assets that are being fractionalized and tokenized might lower the required minimum investment from millions of dollars to only a few thousand. Historically, only institutions could make investments of this nature. Additionally, because tokenized assets can essentially be “borderless,” investors from all over the world are now able to invest in markets they were previously unable to access.