5 main risks of real estate token projects
Despite this, Savills experts said, real estate tokenization shows many benefits, but some failed projects like Terra UST show that it also has potential risks.
First, the risk of De-tokenisation (conversion from tokens to actual value) is an important concept that affects a token’s ability to guarantee value.
Simply put, token holders must be able to exchange certificates of ownership of original assets such as real estate, debt or equity with their tokens, as long as they comply with the standard of due diligence process. customer (KYC) and anti-money laundering (AML). They must be allowed to do so whenever they want without asking anyone’s permission to approve the exchange of property.
This ensures that the token price does not fall too sharply from the original value of the asset. If that happens, some arbitrageurs will take advantage of buying tokens at a discount to their original value and buying back real estate at a cheaper price.
Second, counterparty risk, this is the possibility or probability that one or more parties to a transaction cannot perform their obligations under the agreement and breach contractual obligations. The recent failure of FTX, Celsius, Babel Finance, Voyager Finance, BlockFi, Hodlnaut, 3 Arrow Capital and many other similar platforms is a constant reminder of counterparty risk when dealing with financial platforms. centralized main (CeFi).
Thirdly, liquidity risk, the concept of liquidity is also related to the fact that the bank falls into a situation of insufficient funds when customers withdraw money massively, as is typical of the recent case of Silvergate Bank and the Bank of Vietnam. Silicon Valley. Real estate portfolios are even less liquid than loan portfolios and take longer to sell.
Fourth, legal risks, regulators have been very concerned about digital assets in recent years due to many cases of sudden collapse of some platforms resulting in billions of dollars in losses. This has led to stricter regulatory regulation as well as large-scale exchanges of this asset class.
Most of the regulatory concerns relate to the misuse of crypto assets for criminal purposes such as money laundering. Anti-Money Laundering (AML) and Financial Action Organization (FATF) requirements are required for every virtual currency project. Regulators also spend a lot of effort focusing on this area to ensure that it does not jeopardize the traditional banking system, resulting in widespread damage to financial institutions.
Fifth, infrastructure risk, is the possibility of problems in the infrastructure of the platforms. This usually includes risks related to the technology on which the platforms are developed.
For most token projects will usually face infrastructure risks, except in some cases that have been thoroughly tested and verified by the market.
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