Real Estate Tokenization A Fund Manager’s Perspective

Interview with Mathieu Saint-Cyr

For this series of interviews. Five experts propose to demystify tokenization in their field of expertise. From the point of view of the real estate developer the independent manager at the bank via the auditor.

For this second interview. In addition to his duties at GMG Mathieu is Chairman of the Board of Wecan Tokenize. An innovative digital asset platform and co-founder of the Fintech Association of Geneva.

He was previously Head of Trading at MKS a leading precious metals trading and refining company. Prior to this role Mathieu led BNP Paribas’ global gold derivatives trading business. He holds two MScs in fundamental and financial mathematics.

How do you think technology improves the financial sector?

I think that technology is an integral part of the financial sector, whether in managing clients with onboarding. In the investments they make but also in the controls that must be put in place around these investments. Technology and in particular the technology around tokenization. Responds to these three phases of investment management.

At the onboarding level digital profiles are created for customers. Which greatly facilitates these processes. Which are becoming increasingly faster and more efficient and therefore more pleasant for the customer. At the investment level this allows the client or investor to better understand their investments. To better track them and to monitor them in real time. But also if necessary to create a certain liquidity. That is to say to be able to resell shares of assets that they would have bought.

And then finally, at the level of control. Which is an extremely important point in the financial system in general. And of course the standardization of control methods via technology. For example in the context of tokenization. This makes it possible to have a circulation of assets and investments that is regulated.

What advice(s) would you give to fund managers wishing to offer tokenized assets to their clients?

Maybe two tips. The first is to get closer to players who have been active in tokenization. Players who have a “track-record” who have proven that they have mastered this technology and that they can also deliver concrete and usable solutions for investors and for the people who work with those investors. And then also of course exchanges of financial assets.

So it is very important to have a framework that is regulated. To understand what regulations are in force in the country in which this manager is located. But also the country in which the investors are located. Which are not necessarily the same. The rules differ from country to country and it.

What is the investment process?

Finally, the token and the way it is offered particularly in the context of Wecan Tokenize. Is nothing more than a digital representation of a title deed to an asset. It is a means of accessing an investment. You have to be careful that this means is equivalent to a classic title deed. For example a paper title like a contract that you have signed at the notary.

Once you have this digital title of ownership the processes are the classic processes. Which are onboarding as a customer, i.e., KYC – saying who you are showing proof of identity. Creating the investment through the payment and purchase of its tokens. And then you are in a financial market in the same way as you would be if you were buying stocks. Fund units or other financial instruments and you can trade these financial securities in a completely equivalent manner.

What is the legal framework for this financial structuring?

The legal framework is a financial legal framework in the broad sense. That is to say that we must comply with the regulations in the country where we are. In Switzerland it is the regulation as it is proposed by the FINMA. If you are in Luxembourg it is the regulation as it is enacted by the CSSF.

It is very important to understand which part of the current regulations. We can already use, i.e., the transfer of titles, the transfer of financial assets and which part of the regulations are specific to the use of digital securities or tokens.

As far as Switzerland is concerned I think that we have a great advantage since the regulator made a decision. Very early on several years ago now and in any case well ahead of the regulators of European countries or other countries in the world. So the framework was proposed in two stages.

Firstly a framework that we call “sandbox”. That is to say that we try to set up the first transactions and the first projects. And then the law that takes place and in particular this year which is starting in place. As for the rest of the financial assets and which specifies the cases of application and the cases of use of these tokens.

What are the risks of investing in real estate via tokenization?

I think it is very important to understand that tokenization is only a means of access to a financial product and which in this case happens to be a real estate asset, but one could very well imagine tokenizing a part fund – which has already been done – or other types of financial assets such as stocks or bonds.

The risks inherent in investing in tokenization are ultimately the same as the risks of investing in the underlying or the final asset in which one invests. Do not think that since we are doing tokenization there is no longer any real estate risk. The first risk finally is the real estate risk when we do tokenization on real estate.

There are also certain risks, in particular a regulatory risk: you have to make sure that the token you are buying, and if necessary that you are going to resell, is indeed issued by an issuer that is regulated in the country in which you are is located and which is regulated in the country in which the customer is located. So, there is a slightly increased regulatory risk.

And then finally there is an exchange risk which is different than for traditional financial securities since generally the exchange of tokens is done on market places which are market places which are perhaps less regulated, or in in any case with actors who have less experience.

This is why we strongly recommend the use of tokenization in the context of partnerships with entities that are very well known. For example, in Switzerland we have an initiative with the SDX exchange, i.e., the digital exchange of the SIX exchanges, which is the national exchange, and in this context this risk is greatly reduced.

What were the challenges and obstacles to using cutting-edge technology?

Finally, I think that tokenization is not as avant-garde as it was in the past. It is democratizing enormously and we see in particular that blockchain technology, which has made a lot of noise through crypto-currencies in recent years, is finally extending to a whole set of much broader applications.

Tokenization uses the same technology and is based on the exchange of title deeds of assets which are already existing assets in the market and which can be exchanged freely in this case either real estate or real estate units, or real estate fund units.

Ultimately challenges

So, the challenges that we encounter are ultimately challenges of adoption, of use by the customer or the final investor of the technology, regulatory challenges with regulations that are being put in place very quickly, particularly in Switzerland. But which has not existed for 10, 20, 30 or 50 years. So, there is bound to be work to be done to fully understand the nuances of using regulations for token trading. And finally, I would say that there is also a challenge in terms of reputation and education.

It is very important to understand that someone who invests in a real estate token, again that is to say that he has a digital title to a real estate asset is not an investor at all who invests for example in crypto-currencies or Bitcoin.

Making the nuance and differentiation between its different assets in the blockchain sphere is also a challenge and this is where players like Wecan Tokenize or Wecan Comply have a very important role to play, education, simplification and explanation. different ways of using technology.

How do you see investing via tokenization in the next few years?

My opinion, and the one we share at Wecan Tokenize, and by extension with our sister company Wecan Comply and all the discussions we have with financial players on this issue really leads us to think that the share of tokenization in the exchange of property titles, particularly on real estate, will expand drastically over the next few years. We have seen a few pilot projects over the past two or three years, then larger-scale projects over the past few months.

All of these players are increasingly using this technology to bring in a greater number of investors, ways to invest smaller amounts in projects that until now have generally been reserved for professional or institutional investors.

Where are the leaders in the promotion and management of real estate assets?

I think that in this sector of activity the leading companies or in any case the pioneering companies which are committed to developing the use of technology have gone from a phase of discovery, understanding, study of the question to a phase of setting up many pilot projects.

The latter have very practical and very pragmatic aims for customers who already exist on issues that they are trying to solve with tokenization, but also with other methodologies, securitization, exchange of fund shares, funds which are not necessarily listed, between entities which generally do not exchange their shares.

I am thinking, for example, of foundations on the Swiss market. So, there is a whole set of projects, which are very practical projects where tokenization is used. Perhaps not yet for the greatest number, perhaps not yet for investment amounts of a few euros, but in any case.

We are a long way from the projects of a few years ago where we were really limited to “proof of concept” without really practical applications. Today I would say that it is very practical very pragmatic and more and more. Widespread and especially widespread within actors of very diverse profiles.