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Blockchain & Real Estate with RE Tokenization via NFTs & Metaverse Properties by Wes Williams
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Nov 6, 2023
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0:00
Hello everyone, my name is Wesley Williams. I'm an attorney licensed here in California
0:07
I've been working as a real estate attorney for quite a number of years now. I've been
0:16
in the title insurance industry, which is an ancillary service to the real estate industry
0:22
for almost 30 years. And mind you, what I'm going to be talking about today is
0:29
blockchain cryptocurrencies and its application to the real estate industry, specifically here in the United States. A little bit of background with respect to this
0:41
So normally when I present this presentation, I present it to newbies of cryptocurrency and
0:50
blockchain technology, and it's mostly given to real estate professionals here in the United
0:57
States. And it's not specific to any state. So keep in mind, in the United States, our real
1:04
property laws are state-level laws. We have federal laws that kind of govern all the states
1:13
and we have federal regulators as well. And I'm going to be talking about that as I go
1:19
through the slides. And then from a real property perspective, we have state law that governs real
1:25
property rights and things of that nature. And as I mentioned, I normally give this to newbies
1:31
So since everybody here, I'm going to assume everybody knows about Bitcoin and how cryptocurrency
1:37
works, the mining aspect of it and consensus aspect of it. So I'm going to go ahead and skip
1:44
over a lot of this information here since most of, I'm assuming most of you know what this is about
1:50
And I'm going to get right into, let me see, go ahead and pass this up. I'm going to go ahead and
1:58
talk about DAOs for a minute because I anticipate DAOs playing more of a role from an entity
2:07
perspective in real estate purchases and contracts and things of that nature. Dow
2:16
if nobody really understands what they're about, the term Dow is in reference to a decentralized
2:22
autonomous organization, similar to a corporate structure like any corporation or limited
2:30
liability company, limited partnership, things of that nature. These are different in that the
2:36
governance is basically controlled by all the owners and participants of the DAO that own these
2:43
DAO tokens. And these tokens that are required confer certain rights, voting rights, things of
2:49
that nature. And it doesn't function as a typical corporation would where you have a board of
2:55
directors or officers of the company that kind of manage the day-to-day operations. As I mentioned
3:01
And it's done in a way that allows for a more democratized voting structure to occur within these organizations
3:12
And from a legal perspective, there hasn't been any sort of legal wrapper for these DAOs
3:19
In other words, if there's some sort of contractual rights or if there's an issue that needs to be resolved in a court of law, there really isn't any sort of structure that would allow it to kind of deal with these sorts of issues
3:38
And so Wyoming has actually created a legal wrapper in the form of a limited liability company for these DAOs to work under, because otherwise there is no classification
3:50
And if there was an issue, more than likely, at least here in the U.S., they would be classified sort of as a general or viewed as a general partnership, which has its own types of issues and liabilities
4:04
and you don't have that corporate protection that kind of shields the shareholders from liability
4:10
in this case, the general partners would be responsible for... Everybody would be considered a general partner
4:15
Therefore, everybody would be responsible for all the liabilities of the organization
4:20
should something go wrong. And this sort of brings into the next issue of when you're dealing with real property rights
4:31
you're going to be dealing with state-level laws, as I mentioned. And real property has its own set
4:39
of laws that you have to contend with. A lot of it is general common law amongst the states, but
4:45
as I mentioned, each state has its own laws. And bringing in the use of cryptocurrency brings its
4:53
own set of laws and issues and regulatory issues, which really aren't well settled here in the US
4:59
And as I mentioned before, I'm going to be speaking solely to the US legal and regulatory issues because each jurisdiction has their own set of laws, including the European Union, as well as all the other countries out there that are having to deal with these issues of cryptocurrency because it is a global phenomenon
5:22
It's not localized to one jurisdiction. So here in the US, one of the big issues is the classification of these tokens. How are these tokens classified? And anybody who's been in the cryptocurrency space long enough knows that the SEC has sort of kind of taken the lead on this, but there really is no well-settled regulator that regulates these assets
5:49
And really, there is no legal definition of what's considered a security token as opposed to some sort of utility token, i.e. commodity token
6:00
And then a payments token, sort of like a stable coin or any of these other tokens that we have out there, even NFTs right now
6:07
Most people just assume that these are commodities, but the SEC has also kind of chimed in saying, hey, we think these also may be securities
6:15
So getting back to this, so from a legal perspective, you're looking at classification of tokens. What are these securities or the commodities, payment tokens, derivatives, et cetera. You're going to have UCC provisions, which is a uniform commercial code provisions. It's laws that relate to personal property issues and not necessarily real property
6:37
But like I said before, because if you're going to be using these tokens as some sort of digital representation of real property assets, you have to consider all these laws when dealing with cryptocurrencies, i.e. tokens
7:01
So let me go ahead and continue. So jurisdiction, obviously, is one of these things where are these tokens going to be traded
7:07
Uh, there's privacy concerns that you have to look into at the state and federal level
7:11
and then, uh, taxation, you know, how are these tokens going to be taxed
7:16
Okay. So as I mentioned at the federal level, um, cause here in the United States, uh, each
7:23
states have their own laws and then at the federal level, the federal government has its own laws as well
7:28
So, um, as I mentioned before, um, you know, from, from the perspective that these tokens
7:33
can be classified as a security. The SEC is the regulator when it comes to regulation of securities
7:41
investment contracts, things of that nature. Then you have the Commodities Future Trading Commission
7:46
They're the regulator that regulates commodities. And then, to the extent that these tokens are
7:54
considered substitutes for currency or money, then you have FinCEN through the Treasury
8:02
that kind of has its own laws with respect to that. My current role is corporate counsel for
8:13
a company called Exola. I have since pivoted from real estate and I'm now working for a video game
8:19
commerce company And so a lot of what I do is determine whether or not my company is subject to FinCEN money transmitter regulations So that a big issue that you have to deal with when you a mentor of these tokens to some extent
8:39
In other words, if you're a company that issues a token, you may be considered an administrator of virtual currencies
8:48
and therefore subject to FinCEN regulations as well. So that's, like I said, a big thing
8:54
From a taxation perspective, the IRS is basically here in the US
8:59
classified tokens as property rights. And therefore you have to report obviously all your gains and losses to the IRS
9:08
when you're handling your tax filings. Again, through FinCEN, Bank Secrecy Act
9:16
if you are an administrator or exchanger of virtual currencies, specifically ones that are
9:23
centralized, and to the extent that our federal regulators have jurisdiction over decentralized
9:30
protocols, there needs to be anti-money laundering programs in place, as well as know your customer
9:38
know your business requirements when you're dealing in these types of digital assets
9:43
um okay and then OFAC is another one too that that you have to consider um because and if you
9:51
are dealing with um and OFAC started listing sanction wallet addresses on there so if you're
9:58
dealing uh with somebody who is on the sanctions list um you know you have to contend with uh OFAC
10:04
with respect to that. Next thing. Okay. So another thing here too is a lot of
10:15
there's been a lot of talk around the issue of stable coins and how they should be regulated
10:21
and who should be allowed to issue stable coins. As you know, there's a number of
10:27
centralized stable coin issuers out there, and I'm not talking about algorithmic. And I obviously
10:33
anybody who's here and in the crypto space long enough. What about Terraluna? What algorithmic
10:39
stable coins? I'm not going to be talking about those as much because it's kind of sort of beyond
10:47
the purview of this. But to the extent you're dealing with fiat backed stable coins through
10:54
having 100% reserves in either dollars or US treasuries in an account that's issuing these
11:03
stablecoins. The federal government right now, as most of you know, if you've been in the crypto
11:09
space long enough, knows that we've, through the president's working group, among the other
11:15
regulators, as well as the Office of the Comptroller Currency, have looked at stablecoins
11:20
and their impact on the overall global markets. And now we're seeing, matter of fact, even this morning
11:28
there was an announcement that two senators, Loomis and Gillibrand, had proposed a new bill
11:37
to kind of outlining how certain aspects of the cryptocurrency market should be regulated and have laid out a really good proposal
11:49
for the federal regulation of all aspects, including token classifications, as well as
11:57
stablecoin legislation, banking legislation, taxation, so on and so forth. My point being is that around stablecoin issuers, it's looking as if the US is heading towards
12:13
a policy of regulating through the existing banking infrastructure. So you have states like Wyoming who have issued, proposed, actually passed new legislation that allows for the chartering of these new banking institutions for purposes of custody and cryptocurrency, as well as issuing stable coins
12:36
And in July of 2020, the OCC issued an interpretive letter allowing for federally chartered banks to be able to issue stablecoins and deal in stablecoins and custody cryptocurrency
12:51
So that was important to the extent that they're following that. I don't think that's actually taking place
12:56
But Wyoming is still proceeding. As I mentioned, Wyoming has issued these special depository charters for the purposes of custody and cryptocurrency, as well as dealing in stable coins. And we'll see how far this Loomis bill goes. I think everybody in the crypto industry is excited about getting some regulatory clarity in the states surrounding cryptocurrencies
13:20
state licensing is a large thing right now. If you're an exchange, a cryptocurrency exchanger
13:28
in other words, like for example, Coinbase, a lot of these cryptocurrency exchangers are
13:35
obtaining money transmitter licenses, which means you are subject to FinCEN registration and
13:41
reporting requirements as well, and compliance with Bank Secrecy Act. New York has its own
13:46
license regime. It's the bit license. And so each state has, as I mentioned, each state has its
13:53
it's either regulating cryptocurrency in some fashion or kind of taking a hands-off approach
13:59
California has been sort of hands-off for a long time. But the states, when I actually wrote this
14:06
thing and more states are coming on board, particularly Florida and Texas, these are the
14:13
states that were favorable to cryptocurrency. Yeah. And then I've included a link. If anybody
14:21
wants this, let me know. And it's the current state, each state regulations regarding cryptocurrency
14:29
California recently changed one of its regulatory names from the Department of Business Oversight
14:36
Department of Financial Protection and Innovation. And the reason being is because of a lot of this
14:42
new financial technology that's i.e. blockchain and cryptocurrency that's been emerging. And they want to keep an eye on it
14:50
And I think actually they have done that. And California is going to try to keep up with this
14:59
Okay. Yeah, this was in 2018. It was a token taxonomy act that was proposed
15:04
Hasn't really gone anywhere. As I mentioned, the new Loomis bill hopefully will gain some traction
15:10
I think it's a very thoughtful, thoughtfully drafted bill. I'm going to have to dig more deep into it and see exactly what it's all about and what its intention is
15:24
is. SEC crypto framework. Back in 2018, when I got involved in cryptocurrency blockchain in early
15:33
2017 and kind of watched how the regulatory regime unfolded here in the US, a lot of the
15:41
enforcement actions came out of the SEC against token issuers, particularly around the ICO boom
15:47
during the 2017s. And this was around the same time when Hinman came out and kind of
15:58
Hinman was commissioner of the SEC, came out and said, made a public statement basically stating
16:04
that Bitcoin and ETH were sufficiently decentralized to not essentially fall under
16:11
the SEC's regulatory regime and put that in the classification of a commodity. And Hester Pierce
16:19
also called Crypto Mom, she's, you know, works with the SEC and she's been pushing for more
16:25
thoughtful legislation and, you know, trying to propose a framework to help allow companies that
16:33
were, you know, kickstarting these blockchain type and crypto projects to allow their project to kind
16:40
of give them a safe harbor while they build out their decentralized network That really hasn taken place since Gensler came in as the chairman of the SEC And he been even though some crypto proponents thought he would be a good thing for the SEC
17:00
he's, turns out he's been very aggressive against crypto projects in general
17:08
and, you know, has taken a position that most of the tokens that he sees have also been, in his opinion, securities
17:16
And so he's taken a very, like I said, aggressive approach and has just brought a lot of enforcement actions, again, against these token issuers
17:26
Okay, next one. So here's where we get to the real estate aspect of it
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So within these next slides, I'm going to go ahead and talk about what applications crypto projects present in the U.S. when it comes to real estate
17:40
And then give some examples of some of the types of projects
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I'm not going to get into all of them, but from my perspective, how I'm seeing this unfold here on the real estate side when it comes to the application of these cryptocurrency and token projects and NFTs in the real estate space or in the US
18:03
So back when I first started looking at these things in early 2017, the land registry systems were a big one
18:14
There's a lot of countries out there that don't have land registry systems. In other words, a way for allowing for the recordation of a document that will give notice to everyone that you own a certain property or you have certain property rights in a specific parcel of land
18:33
So some countries have brought in the use of blockchain technology for that purpose
18:39
Here in the States, we have very robust land registry systems. Most of them are what are called a deeds-based system, where the parties to a real estate transaction, the obligation is on them to record the documents to give notice to the world that they have an interest in a particular parcel of land
18:56
There's what's also called a torn system that we have adopted in some jurisdictions here in the U.S
19:02
It's more akin to a government guarantee or land system
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In other words, you go to court and you have an attorney help you and assist you
19:22
And then you basically, at the end of the transaction, get a certificate that shows that you are the owner
19:29
Here are all the liens and encumbrances against your property. And a judge certifies that, in fact, your title is as stated on the certificate
19:37
And it's backed and guaranteed by the government. Now, that's a Torrance system kind of in a nutshell
19:44
Now, like I said, very few jurisdictions here in the U.S. have that
19:50
Australia is one that has a very robust torrent system. And in jurisdictions like that, in my opinion, blockchain and crypto would be very beneficial
20:02
In a deeds-based system, there is no state guarantee, which is why you have title insurance services here in the U.S
20:10
And so in those systems where it's deeds based and you have a title guarantee through a private company that insures title, it's a little more difficult to integrate these types of technologies without having to utilize that intermediary for that purpose
20:28
And the reason is because even though title records are public and anybody can go access them, title companies have done this in a way that allows them to research the title more quickly on a given property and then issue a policy that ensures that their work has been done correctly
20:50
So on the land registry side, you've had some experimentation here in the U.S. through a company called V-Lox
20:56
They're no longer in business. Proppy, who is still in business, did some similar thing in Vermont
21:01
Medici land governance is another one that has done things in Wyoming
21:07
Really hasn't been a lot of press about that. But nevertheless, that is that
21:14
Some of the obstacles in the U.S., as I mentioned, when it comes to the land register system, we have over 3,000 counties in the U.S
21:19
And there really is no consensus amongst the registration offices, which are typically the county recorder offices, whereby they would like to utilize some sort of maybe closed or private blockchain for this purpose
21:42
Like I said, each county recorder has its own budgetary requirements and constraints
21:47
Some are more technologically focused than others, and it varies. So it's been difficult to even get a consensus
21:57
As I mentioned, Adid Space is our state guarantee program. Iowa is one of the states that has a state-run guarantee program, which I think blockchain would work perfectly for
22:08
State recording statutes. Okay, so here's another thing, too. So there's been a lot of ideas about individuals recording or taking their ownership title and being in a blockchain that really is of no legal effect
22:27
It gives really no protections. The only way to give constructive notice and to avail yourselves of state court systems to protect your ownership rights is if you record at the county recorder office level
22:41
any recording that you would do in a blockchain is secondary and as of no effect, at least right now
22:47
until recording statutes here in the United States change. Okay, and then I mentioned other jurisdictions, Brazil, Republic of Georgia, Dubai, Australia
22:59
These companies have experimented with these types of systems in other jurisdictions
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utilizing blockchain to some success. And yeah, that's basically it. Okay. The next issue here in
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the US when it comes to cryptocurrency is the purchasing of real estate using cryptocurrency
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Now, because as I mentioned before, most jurisdictions require the use of a title company
23:30
and escrow services. In other words, an escrow functions here as a kind of a neutral third party
23:37
that facilitates, assists in the facilitation of the transaction between two parties who don't know
23:44
each other, right? Escrow holds the deed, escrow basically holds the seller's deed and the buyer's
23:50
money until certain conditions are met with respect to the sale. And then escrow transfers
23:55
the deed to the buyer and buyer transfers the money to the seller. And then that's in a high
24:02
level how it works. So, um, and title companies kind of function as, uh, here in the U S as that
24:09
provides the escrow service to the buyer and seller and the lender, if there's a lender involved
24:14
So basically having a wallet to wallet transaction are, they're becoming more common
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although they're not as prevalent as if you would. So how it works here in the US
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when you're buying real estate with cryptocurrency is that you typically have to exchange your crypto
24:38
into US dollars in order to settle a real estate transaction because escrow will have to receive the escrow funds
24:48
in US dollars in order to pay the counterparties in US dollars. Because as it stands right now
24:57
the counterparties aren't accepting crypto. And there are other agencies like taxing authorities
25:06
and things of that nature that have to be paid in US dollars because from their perspective
25:11
there isn regulatory certainty around the use of stablecoins But I believe stablecoins will eventually be used as a medium of exchange in real estate transactions because purchasing real estate in a volatile
25:24
currency like Bitcoin doesn't really make sense because then escrow companies will have to deal
25:31
with market issues if the price of the Bitcoin drops or even issues when the price of Bitcoin
25:40
going goes up, they have to, you know, if it's more than what they bargained for, because
25:45
when you go back to how these escrow even works in their transaction, they take their instructions
25:51
from the parties with respect to the purchase contract. And the purchase contract has to be
25:57
written in US dollar terms. Right now, they're not being written in the form of, you know
26:04
however many satoshis or however many Bitcoin. That's just not how it works here in the US
26:09
At least not yet, because as I mentioned before, crypto really isn't used as a medium of exchange, although people are wanting to do that
26:19
But nevertheless, they're having to exchange it out into US dollars. And that's typically done through an exchange of media like BitPay
26:26
BitPay kind of assists in the facilitation of that. And there's a few other ones, foreign pay, that does it as well
26:33
Title companies also won't accept cryptocurrency. They're going to want it converted first, and they'll accept the U.S. dollars, and then they'll essentially settle the transaction in a traditional way
26:45
Okay, purchasing, real estate cryptocurrency. So, yeah, another thing you have to consider, the taxation issues, as I mentioned before, cryptocurrency doesn't qualify for a 1031 exchange
27:01
So, you're going to have to consider the taxability. once you convert it from crypto into fiat dollars. And as I mentioned before, escrow has to consider
27:11
Vincent geographic targeting orders because they're subject to that. And OFAC checks as well
27:22
I'm running out of time, but real estate tokenization, NFTs, as we were talking about
27:27
before. Yeah, real estate, this is happening here in the US. And I'm going to give you a
27:33
I'm going to kind of bypass this and get into some examples because I know I'm running out of time
27:38
So everybody knows what a non-fungible token is at this point. So the way I look at it, I classify it in two different models
27:45
So Propy has a model. Propy is a company that has been, claims to be one of the first to NFT real estate
27:53
And then what they've done is used a special purpose vehicle for that purpose
27:57
And what is a special purpose vehicle? It's basically a corporate entity, a shell, like a limited liability company
28:04
So in this case, what the owner of the property does is they transfer their property from themselves into an LLC, and more likely a member-managed LLC, which whereby the owners own 100% interest in the LLC
28:21
And then what Propy has done is tokenized by way of an NFT wrapper that member interest in the LLC, and then they've listed it on a marketplace for auction
28:35
And then they sold it to the purchaser 100% of the membership interest
28:40
In my opinion, basically looking at this model, this would look more like a sale of an equity interest in an entity, thereby following it within the purview of a security, in which case if you're – which may implicate SEC regulation, even state blue sky laws
29:07
So you're going to have to be very careful when looking at the structure
29:11
If you're a real estate professional wanting to tokenize real estate company
29:16
wanting to tokenize real estate in this manner, you're going to want to make sure that you comply with all the SEC regs when doing it
29:22
And I'm sure that's what Proppy is doing in this case is following those laws
29:28
And then there's another models in this case, which does not, which does actually, which does involve still the creation of an LLC
29:36
entity that holds title to the property. But in this case, and I've been, I have worked with a
29:43
company before that's doing this and they're putting this, they're creating these tokens
29:49
Basically what they're doing is they're tokenizing a leasehold interest in the property
29:57
which instead of it being a security, what they're doing is in fact creating an NFT that's going to
30:05
represent a long-term lease in a property. And this could be for whatever term, a 99-year lease
30:13
as well. So I think you're going to start seeing a lot of these types of different and unique
30:18
concepts coming out because at this point, tokenizing the actual deed, there is no legal
30:25
framework for that, for allow that to happen. And the reason why I say that is because it also
30:32
involves giving constructive notice and then transferring that interest through the public
30:37
records. And there is no way to do that from a blockchain perspective. But an NFT under a lesser
30:44
estate like a leasehold, you can do, and you may be able to transfer the leasehold interest
30:49
through an assignment using crypto technology by way of an NFT and blockchain. So in this case
30:56
what they've done is created a, they record a master lease against the property that then
31:04
connects to a hash of the NFT. So, right. So you'll have the record document connected to the
31:12
NFT in that way. And then the NFT will trade on the blockchain and get transferred on the blockchain
31:17
And then you can track ownership rights through there. And this, from my perspective, looks more
31:22
like the transfer and interest in real estate, which it is, taking it out of the purview of a security
31:30
which allows for a number of things, right? Access to DeFi protocols like MakerDAO, even fractionalization of these tokens by way of a sublease
31:40
where you can have maybe like a timeshare interest in these NFTs
31:46
That's that. And then I'm just, you know, additional applications. As I mentioned before, this is basically created for real estate professionals that don't really have any experience in crypto and blockchain
31:59
So obviously, and I talk about various things. This is what's interesting here, too
32:03
I think it's super interesting that you're going to start seeing the connecting of virtual worlds to actual physical real estate properties
32:14
Like, for example, SuperWorld, you may know of, is one that's a digital representation of real world properties, right
32:23
And then, you know, they're sold by way of NFTs. So you'll have these, you'll start to see structures where you actually own the real property and then the metaverse version of your property as well
32:36
And then those will be transferred maybe alongside your real property transfer
32:45
You'll transfer your real estate, and then maybe the title company will assist in transferring the virtual version of your property as well
32:54
And then there may be a segregation of that too. And to the extent the market sees value in this, I mean, it's kind of really – we're still in the early stages of this technology, and people see value in everything
33:05
I mean, look at the value of these NFTs right now. I mean, some people look at these digital images and go, I would never pay hundreds of thousands of dollars for this
33:17
But somebody else does see value, and they do that to the extent that these are maybe wash trading
33:24
I don't know. But nevertheless, I mean, they may see value in these things
33:30
I think, I mean, that was a quick presentation, but that's it for me
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