Real estate tokenization (RWA) explained

Full transcript

0:12 Hi everyone, I'm Max Dilendorf. I'm an attorney based in New York. I've been advising clients on digital assets and crypto matters since 2017 and in this video I'll be talking about RWA or asset tokenization, especially real estate, which is one of the most active and misunderstood areas in the digital asset industry. My team got involved in asset tokenization back in 2018 when ATS platforms like Securitize went live. Since then we've been advising clients on structuring tokenized real estate and other RWA projects in the US from initial legal design all the way through secondary market strategy. And it's important to understand that we're still in the very early stages of this industry. In many ways this is still day one. One of the biggest misconceptions I see is that tokenization is simply putting an asset on the blockchain. Well it's definitely not. In most cases you are issuing a security and that brings the full way of US securities regulations into play.

1:38 Choosing the right securities exemption is critical. Many issuers structure the offerings under Regulation D of the Securities Act of 1933, often in combination with exemptions under the Investment Company Act of 1940. For For example, if you look at institutional digitized funds, like those structured by BlackRock, you can see how this actually works in practice.

2:13 In 2024, BlackRock launched its tokenized fund, the USD Institutional Digital Liquidity Fund, or BIDL through Securitize, which acted as the broker dealer, transfer agent and ATS platform.

2:31 The Biddle Fund was structured under Reg D, rule 506C, in combination with a 3C7 exemption under the investment company ad.

2:43 So what that means in practice is that it can be publicly marketed but only verified accredited investors who also qualify purchasers can participate.

2:56 So you're looking at a very specific investor base, typically individuals with at least $5 million in net worth and a cap number of participants, generally up to 2,000 investors.

3:11 This is a highly structured, institutional product, it's not designed for retail investors.

3:19 There are also other safe harbor exemptions under the Securities Act that issuers can rely on to market and sell securities in the United States, including to accredited investors.

3:34 And these distinctions matter because they directly impact how you can raise capital, who you can have and accept as investors, and how you structure the entire offering for your real estate or other equity projects.

3:52 Another major issue are transfer restrictions and liquidity.

3:59 A lot of clients assume that real estate or asset tokenization automatically creates a liquid market but that's not how it works in practice.

4:11 You cannot compliantly trade these types of RWA securities on decentralized exchanges like Hyperliquid or Uniswap.

4:22 If you are tokenizing real estate or equity on direct D, your RWA assets are considered to be restricted securities.

4:34 It's important to mention that RWA securities cannot be traded on platforms like Poindeis, Gemini, Kraken, because those platforms, at least for now, only support commodities, not securities, and RWAR securities.

4:53 Additionally, deciding where your RWA tokens will be traded in the US or offshore is a key decision that shapes your entire legal framework.

5:07 We also advise clients anti-questions, things like if they actually need to obtain their own licenses.

5:15 Some clients initially assume that they need to become a broker dealer, registered as an ATS platform, or get money transmitter licenses.

5:26 In reality, that's not always the right approach.

5:29 We help clients evaluate if they should build their own regulated infrastructure or partner with existing licensed entities.

5:40 We also spend a lot of time helping clients think through token design.

5:46 Things like how are the tokens minted?

5:48 Who holds custody of the wallets?

5:51 Who is responsible for the risk of loss?

5:53 What happens if there is a cyber attack or asset loss?

5:58 Can the issuer redeem the tokens and how is the redemption rate calculated?

6:04 Do the tokens carry voting rights or are they purely economic in nature?

6:10 All of these terms must be clearly defined and properly disclosed in the offering documents.

6:18 Structuring is another area where projects often go wrong.

6:23 Traditional corporate structures don't always work well in tokenized models.

6:30 For example, using a limited liability company for a tokenized real estate offering could create complications, especially when you are selling to non-US investors.

6:43 This could require the issuer to manage tax withholding on any distributions made to non-US investors, which can become a major administrative burden.

6:55 You also need to be mindful of rules that could cause the limited liability company to be treated as a publicly traded partnership, triggering additional tax reporting and compliance obligations.

7:10 If you are tokenizing an existing asset, especially real estate, you need to consider lenders consent if there is an open mortgage on the property.

7:20 Many loan agreements could trigger tokenization as a transfer or in conference, triggering lenders consent and approval.

7:29 We help clients navigate those conversations with lenders and banks, educating them on tokenization structures, wallet and custody infrastructure cyber security considerations and how secondary trading of RW assets work.

7:46 Beyond real estate we're seeing growing demand for tokenization across private equity, funds, music rights, film financing and art. But the core principle remains the same you are digitizing ownership interests and those interests are still treated as securities. Another critical question that is often overlooked is cross-border compliance. If you are planning to offer tokenized securities outside of the United States in jurisdictions like Singapore, Hong Kong or across Europe, you need to understand the corporate tax compliance implications in each of those markets.

8:29 Another area that is often under-estinated is cyber security in custody risk. Over the years my firm handled more than 100 arbitration and litigation matters involving cyber attacks, theft of digital assets, custody breakdowns and litigation against custodians for failing to protect clients assets from foreseeable account takeovers and security breaches. People getting hacked, assets are being stolen not just from individuals but from regulated exchanges, trust companies and custodians. This is happening right now and it directly affects both RWA issuers and investors. So if you are launching RWA project, you need to think about how to protect yourself as an issuer and your investors in the event of a theft or security breach.

9:28 You also need to evaluate the platforms you're using.

9:32 What audits have they completed?

9:34 Do they have SOC 2 certifications?

9:37 Are they aligned with NIST cybersecurity frameworks?

9:41 And what regulators or receive those platforms?

9:44 These are not just technical questions, they are legal, operational and risk management decisions.

9:51 Finally, we guide clients for the full operational roadmap from structuring and securities exemptions to licensing, distribution, and ongoing compliance for RWA projects.

10:05 There is no one size fits all framework.

10:07 What works for one project may not work for another.

10:11 So if you are considering RWA project, whether in real estate, entertainment, or other equity investments, feel free to reach out for a consultation.

10:23 Thank you for watching.

A transcript of the recording, so it reads as speech rather than as prose. It explains the law in general terms and is not advice on your own situation, which turns on facts this video cannot know.