Government Regulation Could Disrupt the Adoption of Tokenized Property

Being a relatively new endeavor, it's a gray area for governments worldwide in terms of regulation as most laws are technology agnostic. Since the tokenization of property is increasing in popularity, numerous governments have swooped in to try and enact laws for the sector. Some of the laws are proving detrimental to the tokenized property sector. 

This write-up will explain how government regulation can disrupt the adoption of tokenized property, but first, let's dive into what tokenization entails. 

Understanding Tokenization and How It Works

Traditionally, investors would buy and wholly own properties; tokenization is a means of curing that. It has a fractionalization feature, allowing multiple people to invest in tiny chunks of the same property. For a property to earn the moniker tokenized, it undergoes three stages. Property owners settle on the kind of asset they wish to tokenize. Afterward, they can form a subsidiary or SPV, where shareholders can have rights to dividends and other trappings depending on the asset's nature. Still, the ownership of shareholders is subject to a government regulatory framework.

After identifying what properties to digitize, owners must select and use a reputable platform to generate the tokens. These platforms use blockchain technology to generate 'smart contracts' automatically. These contracts highlight the terms and conditions associated with transactions between sellers and buyers. The rules are viable for life and accompany the token.

Lastly, generated tokens are issued and distributed to investors who have a claim to the tokenized property. However, to distribute the tokens, all standard regulations by individual governments must be met by the property owners. Read on to find out how regulation disrupts tokenized properties' adoption.

Curtailing Efficiency and Transparency

Tokenization is alluring to investors due to the efficiency brought about by smart contracts. Their use in blockchain technology alleviates the need for agents and brokers, like when selling and buying tangible assets. Some regulations have seen governments act as middlemen in the tokenized property sector. 

In countries where the state has penetrated the tokenization sector this way, most of their citizens have shunned investing in tokenized property. Additionally, tokens are cheaper as there are no costs associated with documentation and brokerage fees, which is common with conventional property investments. Regulations that make governments the third wheel in tokenization make them expensive and out of reach for ordinary people.

Since tokenized properties are made possible using blockchain tech that operates as a public ledger, all transactions are accessible to the public. Governments' regulation frameworks seeking to establish bodies to control said ledgers only make the transparency that attracts investors seem like a mirage. 

Additionally, having the ledgers in the public domain increases the integrity and security of the tokenized properties as any inconsistencies are easily noticed. Giving one governmental body this responsibility makes the public suspicious, which leads to them not adopting tokenized properties.

Obscurity In The Definition of Tokens

Since tokenization is a relatively new form of investing, most regulations enacted for the sector vary depending on jurisdictions. The uncertainty surrounding what tokens are hampers the global tokenized property sector since each country defines tokens differently. Regulators worldwide lack a standardized measure or an acclaimed law that clearly states what tokenization entails, meaning players in the industry are left to their means. 

Also, different bodies involved with the sector in a single country may differ in explaining the tokenization industry.

For instance, the Commodity Futures Trading Commission of the US regards the majority of tokens as commodities. In contrast, the US Department of the Treasury's Financial Crimes Enforcement Network sees them as currencies. Such inconsistencies by regulators are confusing to people, and it translates to a poor intake of the tokenized property investments by the citizenry. There is a need for agencies involved to spell out what tokenization entails so as not to scare away potential investors.

Lack of Regulations That Promote Public Awareness

With cryptocurrencies attracting huge attention from the public in the past few years, one might think tokenization should be on the same boat since they both operate using blockchain technology. However, this is not the case as tokenized property sector knowledge eludes most people. Regulators in the industry haven't formulated a framework that enables players to advertise and engage the public on tokenization. The lack of information about tokens occasioned by little or no public awareness hinders the adoption of tokenized property.

Additionally, most people acquainted with tokenized property tend to hesitate when it comes to investing in them. Part of the rationale for this hesitancy is the blockchain technology which has proven labile. The volatility in prices that has been witnessed in cryptocurrencies makes potential investors reluctant as it is nearly impossible to predict future prices of tokenized properties. These can be cured by having clear laws that allow large-scale tokenization companies to publicize their craft. 

Tax Implications

As mentioned earlier, tokenization investment is a new concept that has attracted all kinds of different regulations depending on individual countries. It is a well-known fact that governments worldwide get revenues from taxing businesses; the tokenized property sector isn't exempt from this basic rule. 

Since countries have different taxation rules, therein lies the problem. The unclear determination of what tokenized property should be taxed poses a threat to its global appeal. People from countries that tax exorbitant amounts as tax for tokenized properties may refrain from investing.

Conclusion

Tokenization has the means and capabilities of revolutionizing how property investors operate. On paper, it has a global appeal where investors can operate regardless of borders due to its technology. However, achieving this requires the sector to handle several drawbacks, most of which are brought about by the market regulators.