An AMEinfo exclusive
As a full-service law firm with in-depth knowledge of local laws and customs and dexterity in a range of languages including Arabic, English and French, BSA Ahmad Bin Hezeem & Associates LLP provides legal services to companies in the United Arab Emirates, Saudi Arabia, Oman and Lebanon. , and Iraq.
Among his many areas of expertise are the laws and procedures surrounding the purchase of freehold real estate and the tokenization of real estate.
Issuing real estate tokens on the blockchain and creating a market for homeowners, retail investors, and institutional investors could spark enough interest in the local real estate market to take it to the next level.
In an exclusive interview with BSA Ahmad Bin Hezeem & Associates, AMEinfo asked:
1-Are individual and constitutional investors in this region legally comfortable with this blockchain-based configuration?
The majority of investors in the region still don’t know what blockchain is or how it works in practice. There are also misconceptions about what owning a ‘token’ means from a legal standpoint and whether it allows free and unimpeded access to the underlying asset. We note that this is not just a regional trend, but appears to be a global trend as there has been a marked slowdown in real estate tokenization projects around the world. Institutional investors would seek in particular a regulatory framework on the tokenization of assets to provide sufficient comfort.
2- Do the tokens represent equity in real real estate assets or equity in the company with underlying property?
It depends on the model used for tokenization. Prior to tokenization, REITs were commonly used to split real estate ownership and the model used here was where an owner owned part of a vehicle or a unit in a fund that owned the underlying property. With tokenization, the token itself can be in the actual asset or in a vehicle / fund that holds the asset.
3- Does tokenization give better control over the sale and purchase of real estate assets?
Not necessarily, as it would depend on whether the token is tradable on an open / public platform or functions as a closed loop token which can only be sold on a closed / private platform. We should also keep in mind that, depending on the jurisdiction, the land registry may need to have control over the sale of a property, which means that even if a property is tokenized, the sale of said token must have place with the approval and supervision of the cadastre.
4- Where does the government have control over what happens on the blockchain, when it comes to:
a) Launch a blockchain-based real estate tokenization equity model?
Tokenization of an asset should ideally occur within the regulatory framework of an STO or security token offering, as tokenization of any asset is generally viewed as a financial transaction as well as a real estate transaction. The UAE is one of the few countries to have STO regulations in place and these would require approval from the relevant financial regulator.
b) Smart contracts between seller and buyer?
A smart contract (or any other contract for that matter) is a private agreement between 2 parties and would not fall under the control of the government unless the underlying transaction is a transaction regulated by a specific regulatory body, for example, the sale of a security or the sale of a real estate asset.
c) Token transactions (sale, secondary trading, swaps,…)?
This would be regulated under the same regulations as described in answer a) above.
d) Fee exemptions aimed at encouraging a blockchain economy?
It would depend on the regulation of the transaction occurring on a blockchain. If the transaction in question is part of a regulated activity, the charge may need to be disclosed or approved by the relevant government entity.
5- Can the tokens be grouped together in a fund that can be managed for reinvestment purposes or is it too complicated legally to do?
From a structural point of view, yes, it is possible. We have even seen real estate owners sell parts of their real estate assets in the form of tokens on an open market, thereby increasing equity instead of debt. The token holders are then allowed to resell them on an open market. Using Distributed Ledger (DLT) technology, if the specific version allows it, token holders and issuers can easily track how many times the token has been sold and at what price.
6- What legal documents must issuers have ready / prepared before investors embark on the adventure?
Any entity serious about real estate tokenization must first have a very clear understanding of the securities laws in the specific jurisdiction, as it will need to comply with any active STO regulations. Typically, issuers have a prospectus that has already been reviewed and approved by the relevant regulatory authority for presentation to investors. Once investors showed genuine interest, issuers would then provide them with the relevant legal documentation that would allow them to receive tokens in exchange for transferring the FIAT currency to the issuer.
7- How can investors assess the risk factors associated with the issuer or the assets themselves?
Quite simply, if you are dealing with an issuer of a tokenized asset that does not have the backing of a credible regulatory entity, you should stay away. While cryptocurrencies are largely unregulated and have a certain place in today’s economy, the tokenization of physical assets must follow a specific framework that is defined and is subject to adequate oversight by a third-party entity specializing in this field.
8- What legal remedies do investors have in the event of issuer default or bankruptcy, fraud or misleading information about the properties themselves?
When it comes to tokenization, the first concern would be securing access to the tokens themselves, as securing ownership would be the first battle.
If the ownership of the token is secure, the next step would be to ensure that the token is in fact directly linked to the ownership of the real estate asset. If there is no legitimate ownership link, the only remedy available would be a civil action against the issuer who would most likely have been long gone by the time some type of default arises.
In the event that the token is clearly held and is clearly linked to the real estate asset, this may put investors in a better position as the real estate asset may still be of value, whether yet to be built or already built. .