The Penning Drop: Claus Skaaning from Digishares, shares his insight on the world of Tokenization

# liquidity
# real-estate
# tokens
# tokenization
# investing
# defi
# blockchain
# invest
Claus Skaaning, Founder and CEO of Digishares, speaking at the Blockchain Expo in Europe

Apart from being one of the founding members of Penning, Claus Skaaning is the founder and CEO of Digishares, which is the leading platform for the tokenization of real assets. Claus Skaaning has been an active entrepreneur, exiting one startup within AI and over 2 decades of experience in technology and building companies. The Pen team sat down with Claus, curious to know more about the future of tokenization, how it’s impacting the investment community, and the future implications on society. If you were ever wondering about what Tokenization is, how it works and what it means? Keep reading...

PLEASE EXPLAIN TO US, WHAT IS TOKENIZATION, HOW DOES IT WORK, AND WHAT ACTUALLY HAPPENS WHEN SOMEONE WANTS TO FOR EXAMPLE TOKENIZE REAL ESTATE WITH DIGISHARES?

First off, thanks for getting asked to write for the Penning Drop. As a co-founder, I very much believe in the vision of Penning and look forward to helping realize its potential.

Tokenization is the act of representing an asset with tokens on the blockchain. The asset itself can be digital or in the real world. Representing a fiat currency such as USD with a token, USDC, can be viewed as a type of tokenization. Representing art (physical or digital) with an NFT, can also be viewed as a type of tokenization.

However, typically tokenization has been used to represent a larger asset with several fungible tokens on the blockchain, each token representing some sort of ownership of the asset. 89% of all tokenized assets have been real estate properties. But companies also regularly tokenize solar and wind farms, carbon credits, collectibles, art, mining projects, private equity funds, etc. In the majority of tokenization projects, the asset is securitized first, meaning that an SPV (“Special Purpose Vehicle” = a company) is created first that owns the asset. Then the shares of this SPV are tokenized and issued as so-called security tokens or tokenized shares on the blockchain.

Other types of securities can be tokenized. In some cases, bonds or debt instruments have been tokenized, revenue shares, or profit shares. In the future, it may become possible to directly tokenize the title or deed, but due to the lack of integration options with land title registries and the difficulty of producing investor-friendly investment contracts around title ownership, this hasn’t yet been done.

Most tokenization today occurs on the main Ethereum chain since it has the largest ecosystem and community. It provides several stablecoins, several regulated security token exchanges, many custodians, many investors with Ethereum-based wallets, etc. that are all requirements to support an efficient tokenization project.

DigiShares, my company, provides a white-label platform for the tokenization of real-world assets such as real estate.

BUILDING UPON THE SUBJECT OF TOKENIZING REAL ESTATE, HOW DO YOU THINK TOKENIZATION WILL CHANGE THE WAY INVESTORS/USERS CREATE LIQUIDITY AND WHY DOES IT MAKE MORE SENSE THAN TRADITIONAL MEANS OF FINANCING?

One of the main benefits of tokenization is the ability to make an asset liquid and accessible to investors. Less than 5% of global real estate is accessible to retail investors and less than 5% is liquid and tradeable. So there is a huge potential to disrupt the real estate industry.

Today, the major way of making a property liquid is to list it on a regulated exchange as a REIT (Real Estate Investment Trust). The cost of creating a REIT is several hundred thousand. So very few real estate development firms turn their properties into REITs.

Tokenization is another way to make a property liquid at a fraction of the cost.

Due to the digitization and automation enabled through tokenization, it becomes possible to fractionalize the property into much smaller ticket sizes, down to EUR 100-1,000 per tokenized share.

This opens real estate investment for retail investors and for the longer term massive new inflow of funding into the real estate asset class. Fractionalization is in itself also making the asset class more liquid similar to stock splits being done to create more liquidity. 10,000 investors with $10-value shares will create much more liquidity than 10 investors with $10,000-value shares.

Since we now have both the payment and the asset itself in tokenized form, it becomes possible to make a so-called atomic swap which is basically a trade between a buyer and seller with no counterparty risk. Both payment and tokenized assets are transferred between buyer and seller in one unbreakable operation. This is a very significant innovation that would not be possible without blockchain.

This means asset owners can very easily enable their investors to trade, using an atomic swap smart contract, fully automated and with no counterparty risk.

However, most liquidity currently comes from regulated security token exchanges. There are currently globally around 10 of these, with the majority in the US (tZero, INX, Oasis Pro), a few in Europe (Archax, SDX), and a few in Asia (ADDX).

These are licensed as ATSs in the US and MTFs in Europe. They are fully regulated and licensed to trade securities. They are on-chain, depending on their local regulator’s willingness to adopt on-chain transactions and on-chain custody of securities.

The global volume of these regulated exchanges is still low but we expect it to rise sharply in the future.

BASED ON YOUR EXPERIENCE AND THE MISSION OF DIGISHARES, WHAT OPPORTUNITIES LIE AHEAD FOR INVESTORS IN THIS SPACE?

The mission of DigiShares is to democratize access to real estate as an investment object in order to create equal opportunity among rich and “poor” and longer-term help close the global wealth gap. Rich people regularly allocate 15+% of their savings to real estate. For retail investors, the allocation is close to 0%. Having the opportunity to invest in real estate will enable retail investors to slowly grow their funds over the years and protect their savings against inflation.

Real estate is an extremely stable and robust asset class. DigiShares is working to enable real estate developers to easily fractionalize and hence democratize their assets – and on the other hand to educate retail investors that they now have the opportunity to invest in real estate.

It took 20-30 years for retail investors to get fully well-versed in order to invest and trade stocks through access and education from Charles Schwab, E-trade, Robinhood, etc. Today, retail investors provide 40-50% of funds globally invested into stocks but less than 5% of funds globally invested into real estate. So, there is a huge gap to close. We expect that retail adoption of tokenized real estate will go much faster than 20-30 years.

Another major opportunity not yet really touched upon is the merging of real estate tokenization with DeFi lending. DeFi lending enables anyone to lend against digital collateral. Currently, 99% of that collateral is in crypto assets which are extremely volatile. Real estate is an extremely attractive type of collateral, and it is very much desired in the DeFi industry. Also, the entire real estate asset class is $200+T so much larger than the entire DeFi ecosystem. We are working towards a situation where any real estate developer can use their real estate-backed tokens as collateral to obtain a highly competitive low-interest loan from the DeFi lending ecosystem. 

HOW DO YOU THEN SEE REGULATION WILL IMPACT THE FUTURE DEVELOPMENT OF TOKENIZATION, AND BASED ON YOUR EXPERIENCE, DO YOU FEEL REGULATORS ARE MORE “FOR” OR AGAINST THE GROWTH OF THIS SPACE?

Regulation will definitely impact the development of the tokenization industry but primarily in a positive manner. Tokenization providers have known for years that they working with securities and therefore in a highly regulated space. We have never had the issue of utility vs security tokens. Tokenized real estate will in all jurisdictions invariably be a security.

It has taken some time for many regulators to understand that a tokenized share is exactly similar to a digital share and that the underlying blockchain is just an implementation method, similar to handling a share cap table in a database and having database entries represent share ownership.

For this reason, many of our clients have had to work with their regulator in a sandbox process to help understand how tokenized shares can function within the local legislation.

In many countries, this process is now ending in a positive manner, such that the country will open for broad adoption of tokenization.

In fact, we believe that the tokenization industry is ahead of the general crypto industry. The general crypto industry is still in many places trying to stay unregulated and trying to argue that tokens and coins are not securities. In my view, this will to a large degree fail. The overall crypto industry will become regulated, almost as much as the security token industry, and eventually, we will see requirements for KYC and AML that are similar to the normal financial industry and the security token industry.

DIGISHARES’ MAIN AREA OF EXPERTISE IS TOKENIZING REAL ASSETS, WHICH AREAS DO YOU BELIEVE WILL BE TOKENIZED, AND DO YOU THINK IT WILL CREATE AN ECONOMY OF PLATFORMS TRYING TO TOKENIZE EVERYTHING YOU CAN TOUCH AND FEEL? IF SO, IS THAT EVEN A GOOD THING?

Yes, our primary focus is on tokenizing real estate but we are actually asset agnostic and have among our clients, companies tokenizing solar farms, bitcoin mining farms, mining facilities, land development projects, collectibles, startups, investment funds, private equity funds, as well as whisky production.

Real estate is by far the biggest asset class with values of $228T globally. Another significant asset class that we see is private equity of around $8T. All other asset classes are significantly smaller.

If you are a large asset owner and you want to be sure you can protect the price of your asset in a downturn, then you shouldn’t tokenize to make it liquid – otherwise, we would always see tokenization as a force for good.

DO YOU THINK THAT THERE ARE MAJOR “USER, INVESTOR, AND CONSUMER BEHAVIOUR BARRIERS” TO OVERCOME IN ORDER TO CREATE TRACTION AND IMPACT ON THE GROWTH OF THE SPACE?

Yes, we have a major retail investor education task ahead of us, similar to what Charles Schwab, E-trade, etc. faced at the beginning of the retail stock adoption in the 80-s and 90-s. In addition, the crypto industry has a dual responsibility to both increase user-friendliness and consumer investor protection massively. We as an industry must clean up our act so we don’t continue to see so many hacks and scams. Let’s embrace regulation and work with the regulators to produce a safe environment for users and investors. Huge innovation doesn’t always have to come with huge risks.

THANK YOU