Navigating Legal and Regulatory Landscape: Implications of NFTs in Real Estate Transactions

NFT has raised people’s attention in recent years. In its early days, the concept was pretty much associated with digital arts and collectibles. However, due to its revolutionary impact on ownership and authenticity, innovative applications started to emerge. Real World Asset (RWA) that refers to tokens that represent a whole or a fraction of a physical asset within the blockchain network is a newly emerged application that is rising in attention. The tokenization of physical assets like real estate comes with incredible advantages. For instance in the real estate sector, property tokenization makes fractional ownership possible that improves liquidity. Besides, it brings more transparency and efficiency to the real estate sector. 

Despite the advantages, Real Estate NFTs are associated with important risks that must be aware of. Lack of robust regulation is the main risk that must be considered with care when investing in the property NFTs.        

Legal and Regulatory Implications of Real Estate NFTs

1- Ownership and Authenticity

The process of verifying the initial ownership of the real estate that is tokenized is crucial. That needs investigating legal documentation. The legitimacy of the project that is basically ensuring the ownership of the property that is linked to the NFTs needs robust regulation. Besides, the smart contracts that are utilized to administer the process of NFT minting, money exchanges and ownership transfer must be checked to be well-enforceable and in line with the project terms and conditions.

2- Compliance with Current Regulation

The regulatory process for real estate NFTs is in its early days. Some governments across the globe are working to legislate the blockchain applications. However it needs more time and effort to evolve and grow. In the meantime, the real estate NFT project must be in compliance with Security Law, AML (Anti Money-Laundering) regulations and KYC (Know Your Customer) measures. To safeguard your money, ensure investing in the projects that are executed in countries where asset tokenization and fractional ownership are in the legislation process. For further information about UAE regulation on asset tokenization, you may read our recently published article. 

3- Compliance with International Law

Real Estate NFT is border-less. People from all around the world can get into an NFT marketplace and buy one or multiple property-backed NFT. That may cause regulation pitfalls and complications due to different regulatory and taxation laws. The country where the investor is located might have different regulations from the country  where the property is residing. As such, the NFT must at least be in compliance with international trade law and intellectual property rights. 

4- Regulatory Discrepancies 

Fractional ownership within a blockchain network is illegal in some countries like China. At the same time, it is reasonably regulated in some countries like the USA. The Chinese government has banned any activities in relation to cryptocurrencies. But the US government has put the NFTs under Security and Stock law. As such, the project must be executed in the countries where such activities are allowed and regulated.

How to safeguard your money when investing in Real Estate NFTs

As the first step, you must become fully familiar with how the real estate NFT works. To do so, make sure to consult with blockchain professionals as well as legal and taxation experts in order to know the pros and cons of real estate NFT. Besides, make sure that the NFT project t is in compliance with international laws and regulations. Furthermore, in order to not get involved in vulnerable activities, ensure whether the project meets the KYC and AML measures and requirements. You must read the project white paper carefully and see if the project is transparent enough in terms of coding and smart contract. You must have a good technical knowledge to do so. Alternatively, ask a blockchain guru to check  the smart contract, and the development team behind the project. 

Final Words

Despite the benefits that real estate NFT brings to the real estate sector, lack of proper regulations makes it a risky investment. There are no comprehensive and robust regulations and standards across the globe to authenticate the legitimacy of a real estate NFT project. As such, there is always a possibility that you lose your money by investing in scam projects. Currently, the only way to verify the legitimacy of the project is to firstly invest in the projects that are executed in the countries with proper blockchain regulations. Secondly and more importantly, you must make sure that the project is approved and certified by the local government officials. 

Homecubes is now working with Dubai government officials to develop and launch its first real estate NFT project in full compliance with UAE regulation on asset tokenization. Stay tuned!