Legal restrictions for applying coding in the real estate sector | legal

The world is constantly changing. Proof of this is the discovery of new technologies and the advancement of digitization. Among all of them, one of the most popular today is technology. blockchainwhich allows coding of all types of assets, including real estate.

Before going in to assess whether it would be interesting to apply a token layer to a particular sector, it is appropriate to know what a token is.

Tokenize is a representation of a right (personal or real) in a decentralized ledger (blockchain) usually of a public or quasi-public nature, and this representation is embodied in standardized accounting entries – divisible or indivisible, interchangeable or not – called tokens or coding factors. Additionally, these tokens will be associated with a specific account (andto wallet) that will allow you to store and transfer it. Therefore, tokens are, in essence, transferable, and in general, their rightful owner is the owner of the wallet that allows access and disposal.

Among the benefits of tokenization is the possibility of creating a market that is liquid (as it was previously illiquid) and can be accessed by any type of investor, where anyone can get a token at a low cost and transfer it in the same way. And all this through secure, fast and transparent technology.

In the specific case of the real estate sector, which has traditionally been reserved for large or medium-sized assets, blockchain technology facilitates its democratization. A practical example to illustrate her work is a real estate investment token of one hundred thousand tokens, which small investors can get with tickets worth 100 euros. These tokens, in turn, can be easily converted, making the investment more liquid. So, where there was an illiquid market reserved for a few before, there is now a more liquid market that can be accessed by many small investors.

However, despite the above, coding has a series of limitations in regulated sectors, such as real estate, companies or energy, since its regulation imposes certain requirements of the constitution and the transfer of rights in said sectors. Let us not forget that coding is nothing more than a new way of representing rights, so if we want to enjoy the maximum protection afforded by the regulations that regulate it, we must comply with the same requirements imposed on its constitution, amending it. or send.

At the time of coding a home ownership right and selling said tokens to third parties, both the “token declaration” and the sale of tokens must comply with the requirements set forth in Article 1280 of the Civil Code, which indicates that the Constitution must register and transfer real estate rights (for example, property right) in a public document, and for the said right to enjoy protection against all (Not opposed to third parties) must be registered in the Land Registry.

Otherwise, the buyers of the tokens would be significantly unprotected despite the fact that the said purchases were valid from both a contractual and private point of view. Thus, the registered home owner can sell it to a third party in good faith and token buyers will be unprotected. Although it is controversial that the encoding of a real right, through the corresponding annotation, can be reflected in the property registry, since it cannot be done in a simple, fast and economical way as it happens with the private model, it does not appear to be a very attractive solution for investors.

This limitation applies in Spanish law as well as in most countries in the world, although a public blockchain (controlled by various public registries) is coming soon which allows the transfer of tokens that represent real rights with protection from third parties.

Some countries are already implementing it. However, there are other equally attractive ways, with legal certainty – and simple from a legal point of view – to apply tokens to real estate investing.

On the other hand, we find the notation of participatory loans (strictly, a markup of a credit right of the lender against the borrower) who will use his principal to acquire property, and to which the lender has the right to receive in return for his contribution, the proceeds from the rental of said property and, where applicable, the capital gains from the sale after a period certain.

In the same way, one of the more prominent alternatives is to mark up the stock of a company whose purpose is to purchase – and, when appropriate, manage – real estate. This process has raised some legal skepticism, since many (restrictive) provisions of corporate law are mandatory and applying a layer of coding to stocks – not to mention SL shares – can generate little legal certainty. However, with the entry into force of what is known as the DLT regulation and the new stock market law, this problem will disappear or at least significantly reduce.

Currently most of the existing projects or platforms in the field of real estate investment for small investors (crowdfunding Real estate) these investments are used through participating loans, but few of them have applied a layer of coding to facilitate the liquidity of said investments.

It is undoubtedly a technology that will continue to give a lot to talk about as sectoral regulations recognize and regulate this new way of representing rights.

Xavier Pascual Responsible for Equito’s legal advice.