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Singapore firms dip toes into blockchain tech for property
AT LEAST two Singapore "proptech" companies are using blockchain platforms to "tokenise" property - that is, to create tokens backed by real estate which investors can buy.
It is a pioneering move that is nascent even globally - and is such a new idea that there does not seem to be explicit existing legislation in Singapore governing these digital instruments.
The two companies are FundPlaces and Reidao.
Three weeks ago, FundPlaces went ahead and launched its real estate-backed cryptocurrency called Tiles. Investors are issued these digital tokens in exchange for Singapore dollars, with each token being entitled to the cashflow of the underlying real estate investment which it references. (Most of FundPlaces' projects for which it is raising funds are in Australia and the UK.)
A blockchain is basically a way to maintain a database without a central authority. It makes it feasible to have a fully distributed database in which users always have the most updated version of the database.
FundPlaces' co-founder and chief executive Brian Wee named three advantages of using blockchain:
It makes it transparent for investors, as every transaction is recorded and visible on the chain;
It reduces the cost of investment, since there are no asset managers involved; and
It improves the liquidity of real estate, because the capital outlay for buying a token is much smaller than that for an entire property.
The response has been encouraging so far, he added. Within two weeks of launch, FundPlaces raised £200,000 (S$355,808) for the co-financing of a UK residential development project. It also raised about A$30,000 (S$32,534) out of a targeted A$500,000 for another residential development project in Perth. Both projects are targeted to offer returns of 15 per cent or higher.
Asked for its stance on such instruments, the Monetary Authority of Singapore (MAS) cautioned caveat emptor ("Buyer, beware"), citing the potential abuse of such platforms for criminal activity.
Its spokeswoman said: "The anonymity afforded by such new technologies and products, as well as the potentially wider reach at faster speeds, could certainly allow criminals to abuse them to cloak their illicit activities and gains.
"Whether the offer and exchange of digital tokens on blockchain-enabled platforms constitute an activity to be regulated by the MAS depends on the facts of the case. MAS is closely watching this space."
The regulator added that platforms and products that fall within the Securities and Futures Act (SFA) and Financial Advisers Act (FAA) will have to be regulated, and be subject to obligations to counter money laundering and the financing of terrorism.
This will apply no matter where their investors are based - a pertinent point, given that online blockchain platforms essentially open the floodgates for investors from across the world to take part in deals.
Gerard Ng, a partner in the banking and finance practice at RHTLaw Taylor Wessing, had helped FundPlaces draft its documentation and structure its transactions. He described the job as "novel" but "not easy". He said he had to start with the most basic of definitions, for instance by answering the question of whether the digital token, Tile, is considered to be a security, which would subject it to the SFA. He decided that it was not, because it was neither a debt nor equity instrument.
Because FundPlaces does not dispense advice on corporate finance, he concluded that this would exempt it from the need to apply for a licence to operate, as required under the FAA.
He said: "Our laws were not designed with virtual currency or related technology in mind. Businesses that offer products and services using innovative technology have to deal with issues surrounding the uncertainty of the applicability of certain laws to such products and services."
In this regard, the US appears to be a step ahead. The Securities and Exchange Commission this week said companies that raise money through the sale of digital assets must adhere to federal securities laws and must register the deals with the government, as should exchanges that offer trading of cryptocurrencies such as bitcoin and ether.
Mg Ng said: "Existing legal regimes are still applicable and relevant, and must be looked at in detail. Structuring the transaction involved lateral thinking and copious research to understand the technology, the products and business model."
He also referred to existing laws such as contract law to develop a set of rules to govern the legal relationship between his client, FundPlaces, and its investors; he also had to consider laws governing real estate in the jurisdictions in which the properties are located. Meanwhile, Reidao is beating its own path. Its co-founder and chief executive Darvin Kurniawan said that its blockchain platform is still at the proof-of-concept stage; it is planning to test it by acquiring three properties in Malaysia next month and allowing the community to subscribe to them.
Unlike FundPlaces, which uses its own private blockchain platform - meaning that only its members have access to it and only the operator can add blocks to the chain - Reidao uses the public Ethereum blockchain.
It also uses the gold-backed token called DGX, which is more stable than the volatile Bitcoin and Ether.
How the process works: When the full amount for a property has been raised in tokens, Reidao liquidates this amount to buy the property in the local fiat currency.
At distribution time, cash is converted back to gold and then to DGX, which is paid out to token holders.
Mr Kurniawan said his company had contacted MAS when it started working on the idea, but the central bank did not "make any real comments" due to the lack of legislation to instruct the process.
Reidao is now just observing the relevant rules, such as laws on trust entities, into which it plans to place its properties.
Both FundPlaces and Reidao recognise the risk that "dirty" money can be laundered through their platforms. To overcome this, they have put in place know-your-customer (KYC) and due-diligence processes at the pre-registration phase. FundPlaces' Mr Wee said, for example, that his outfit requires its Singapore investors to have a local bank account, so the banks (and their own KYC processes) act as a "first shield".
FundPlaces plans to expand to Australia, China or India. Mr Wee said: "It is probably a little less risky now, because we are dealing mainly in Singapore and funds come in from people with Singapore bank accounts. But once we start going overseas, there will be much higher risks."
Mr Ng from RHTLaw added that no platform operator can guarantee that its platform is not being used to launder money: "Despite the negativity associated with payment using virtual currency due to the use of Bitcoin as payment for illicit goods and to launder money, the fact remains that virtual currency can be an ideal and a legitimate means of payment for goods and services," he said.