IllinoisCRE Five things to know about blockchain and CRE Aaron Lohmann September 25, 2019 Share on Facebook Share on Twitter Share on LinkedIn Share via email Blockchain technology is making headlines—and it isn’t just hype. With the potential to digitize and accelerate the CRE investment process, blockchain is poised to transform CRE finance. Blockchain and the related technology of the digital security token can deliver CRE transactions with speed, security, transparency and efficiency—and the ever-important securities regulatory compliance. 1. A blockchain can serve as a digital ledger As its name suggests, a blockchain is a database of digital blocks of transaction data, each block timestamped and connected to the previous block via secure programming. Think of it as a digital ledger that records transactions, just as you might record transactions in an accounting ledger. Rather than residing on a single server with a single owner, a blockchain is replicated across many computers to create a self-managed distributed ledger. Because it’s a digital ledger distributed across multiple self-managed server nodes, a blockchain enables every participant in a transaction to safely create and share the same data. This makes blockchain technology ideal for documenting transaction documents such as property deeds, mortgages and shareholder agreements in a way that’s highly secure and impossible to alter or erase. 2. A blockchain reduces the cost of trust while accelerating the transaction process From attorney fees to lost property income or sales proceeds, CRE investment disputes are costly—and so are the efforts required to mitigate the risk of future disputes. Consider your most recent commercial real estate financing or investment deal. How many emails, documents, people and signatures were involved to create and execute a legally binding contract? Probably more than you care to remember. Using the distributed ledger of the blockchain drastically reduces the time and associated expenses required to ensure trust. Updates to the digital ledger are automatic and the ledger is programmed to be 100 percent secure and tamper-proof, empowering every participant in the transaction to securely create and share the same data. As a result, blockchain-based transactions reduce the reliance upon attorneys and other parties involved in creating trusted CRE finance and investment agreements. Need to confirm the chain of title? Want to verify that Joe Moneybags should receive 75 percent of the sales proceeds for a property? Deeds of trust, equity agreements, loan terms, regulatory compliance documentation and other transaction data are all recorded in the blockchain ledger. Thus, a blockchain is ideal for documenting payments and financial records for CRE transactions. 3. A blockchain can support “smart contract” capabilities for automating transactions While Bitcoin is probably the best-known cryptocurrency backed by blockchain technology, it is used primarily for peer-to-peer Bitcoin payments. Other cryptocurrencies and blockchains—notably, Ether and the Ethereum platform—have broader functionalities, such as the ability to create and execute “smart contracts.” A smart contract is a bundle of code programmed to execute important parts of a blockchain transaction. For example, a smart contract can express a transfer of ownership of an asset, execute an asset exchange in compliance with securities regulations, or ensure that payments are delivered in the right amounts to the right parties. Ethereum is an open-source public blockchain platform that supports smart contracts. Using Ethereum, software developers are able to build and deploy decentralized applications to facilitate an infinite number of functions, such as the computation of complex financial transactions or even recording and processing highly confidential healthcare data. 4. Blockchain-enabled security tokens can make CRE as liquid as stocks and bonds Creating smart contracts isn’t the only advantage of using the blockchain in CRE transactions. A platform like Ethereum can be used to create digital security tokens that represent financial instruments, such as CRE equity or debt offerings backed by real estate assets. Tokens can be also programmed with smart contract capabilities to execute dividends from an equity investment, sales proceeds, loan payments or other payments. That is, an investor could buy a security token as a means of acquiring a fractional share or complete ownership of an asset, or a lender could place capital through the mechanism of a security token. Then, the security tokens can be traded on a digital exchange just as stocks and bonds are traded on stock exchanges—bringing new liquidity to the otherwise slow-moving, illiquid CRE marketplace. And, the underlying technology can create real-time auditable, trusted records of the transfer of ownership. This new secondary marketplace for CRE-backed tokens empowers project developers, owners and investors to participate quickly and easily in the marketplace, minimizing the need for such intermediaries as lawyers and brokers and the associated phone calls, emails and paperwork. Lenders, in turn, gain access to a highly efficient, streamlined marketplace for placing capital. And, with smart contracts automating transaction processes, project owners and investors can avoid bank processing fees. 5. The power of the blockchain in CRE is not hypothetical Blockchain in CRE is not a “someday” concept—the technology is already proven and available. The combination of speed, transparency and liquidity has long been the Holy Grail of CRE and, today, it’s within reach. It’s not “when,” it’s now. About the author Aaron Lohmann is co-founder and CEO of Earn.re, an online exchange platform that enables financing of commercial real estate via the blockchain. He has over 15 years of experience in executive management and has led the successful development of numerous companies and organizations.