Scope of NFTs in the Real Estate Industry: Need for a Better Regulation of NFTs? Part II
[Sneha is a student at National Law University, Odisha. The following post is the second part of the two-part article, the first one being available here.]
Non-fungible tokens (NFTs) are risky investments because they have been frequently subject to the “pump and dump” schemes in the digital world, similar to a practice in the stock markets which is considered illegal. The pump and dump scheme in the crypto world is a practice wherein crypto investors release misleading information that results in raising the price of a currency post which the same is sold at a profit. Essentially, the investors are pulled first and it is projected as if the value of the stock/currency is soaring and then when the same falls, these investors sell it at a profit, resulting in loss to the other investors. Therefore, since prices can be artificially inflated, investment in NFTs poses risk to retail investors.
Further, transactions are carried out in a decentralized network, meaning although the transactions are linked to the online identity of the user in the NFT ledger, it often becomes difficult to track the physical location, nationality and real identity of the user in such cases. Most transactions involving NFTs are done with crypto wallets i.e., digital wallets holding crypto currencies. However, some recent incidents of crypto thefts and frauds have posed questions on the security and safety of using such crypto wallets. Data has revealed that the latest crypto fraud unearthed in 2022 was that of Morris Coin wherein a website had lured over 900 investors to invest INR 1,200 crore in a fake crypto currency i.e., Morris Coin. Thus, using crypto currencies and crypto wallets for purchasing NFTs will further exacerbate the incidents of Crypto frauds/ Stealing from Crypto wallets.
NFTs are digital tokens that may be subject to copyright law, and through digital rights management (DRM) the rights of the ownership of an NFT can be easily protected. However, it has been speculated that such rights i.e., DRM of the ownership of the digital asset has led to the concentration of powers in the hands of the publisher, limited consumption of the product/token due to ownership rights, and possible monitoring of user activity. While DRM has been identified as a protector of creative works of digital artwork like the NFTs and crypto assets, such limitations have resulted in creating barriers to their entry in the market. Now, money is considered a medium of exchange, a store of value, and as a unit of account in the world of finance. Money, in most of the countries including India, is held by government/government authorized entities like RBI in the case of India and such authority regulates the way money is supposed to flow in the market. The authorized entities enable payment of money through means such as banks, credit cards, payment wallets, which are in turn licensed by the government to carry out such transactions. This centralized system of regulating the flow of money in the economy is very different from the way cryptocurrencies are used as digital currencies for making payments. There is no centralized authority at present that regulates or recognizes the legal tender of NFTs or cryptocurrencies and thus there is no sovereign guarantee for such assets. This including the speculative nature of the digital assets which bear high risks due to their high volatility in the market ultimately puts the consumers at a disadvantageous position.
Given this understanding, it is imperative to suggest that it is high time for the Government of India to take reference from countries like Japan and the United States where payment using digital currencies has been allowed subject to their licensing, and introduce laws that can better regulate the use of digital assets in different industries.
Analyzing the Scope of NFTs in the Real Estate Industry
One of the most active industries in the market is that of real estate. However, it is also one of the most unorganized sectors. Although we have made significant progress in digitisation of ownership records and maintaining a digital ledger of transactions, we’re still far from complete digitisation of the whole process. The current dependence on the offline process involving paperwork and frequent visits to government offices not only delays the whole process, but also increases the chances of corruption, tax avoidance and other malpractices.
While numerous attempts have been made to switch to a digital-only mode, it has still not been completely successful as there is no proper way of maintaining a real-time ledger of transaction history, ownership and change in ownership of properties.
Use of NFTs and blockchain for real estate transactions will reduce the possibility of fraud, errors and risks along with eliminating the need of middlemen or brokers. It will also make the process significantly quicker, enabling the seller and the buyer to save time as well as money. In high valued properties with high price sensitivity, the ability to close the transaction in a matter of a few minutes can benefit the investors in case the price increases due to speculation. Transparency and ease of purchasing will also garner interest from more buyers, especially from first-time buyers. While India is still opening up to the concept of fractional ownership of real estate for investment, NFTs can speed up its adoption, especially among the younger generation. With NFTs, parties who own a fraction of the property can easily prove their ownership and transfer the same without having to sell the entire property. The flexibility provided by NFTs in such cases will not only boost investor confidence, but also allow entry of more retail investors into a sector which has so far been dominated by institutional investors.
Apart from the key role that NFTs can play in the entire process of physical real estate management, it has also been observed that NFTs have significantly impacted the metaverse of real estate properties. It all started with the onset of the COVID-19 in 2020 which forced people to distance themselves from the physical world, eventually resulting in tech enthusiasts exploring the digital world by investing in metaverses. Real estate became one of the sought after industries; one such example is the creation of The Mars House by Krista Kim in 2021, which was made open to people for a virtual tour of the property for $200 per ticket with an option to rent the property for [virtual] wedding functions and other parties/social events of the people.
The disruption caused by the NFTs in the digital world may seem uncanny, especially because the risk in investing virtual currencies lacking government backing/legal tender is very high. However, it could be said that just like in the case social media platforms which were once branded as fad are now the most operated platforms, the metaverses of real estate properties may also boom in the future.
As such virtual property i.e., real estate NFTs aren’t that different from physical property except that the former can only be perceived by our eyesight but the same cannot be physically experienced. People have been using virtual real estate properties to design their interiors, socialize with people, organize parties and many more such events. Thus, in terms of investment planning, a diverse investment portfolio can be followed in metaverse real estate properties similar to what is done in a real-world real estate management. A diverse investment portfolio is basically a strategic financial planning in real estate properties where the investor/investing party follows an approach whereby a diversified portfolio is created to make money. Essentially, the parties do not invest in just one stock but instead categorically spread their investments in different stocks, companies, bonds, etc. This helps in minimizing the ripple effect that may be created due to any of the investments suffering loss in the market. Further, due to scarcity i.e. limited acres of land, the real-estate properties in the metaverse are heavily priced (inclusive of mortgages with interest rates). However, the scope for renting of properties in the metaverse can help people recover their expenses as well as earn a good income out of it.
Technology is revolutionizing every industry, and real estate is just one of them. Being one of the most active and longest-standing industries, investments in real estate properties are bound to grow in the coming years. NFTs are making things possible which could have never been otherwise possible. People are exploring tech-driven methods to expand their horizons of financial investment and social interaction. NFTs will be a game changer for fractional owners of real estate for investment purposes too, as established earlier. Blockchain technology will help maintain transaction records and further aid in reducing disputes in ownership.
Moreover, NFTs are a certificate of ownership in assets; it is distinct from the existence of the assets per se. Therefore, given the rapid development that is happening with the scope of the use of digital assets, it is important that the Indian authorities take active efforts to effectively regulate the use of digital technologies, be it the NFTs or crypto currencies. Strengthening the regulatory framework will help ascertain the source and operability of such digital assets which are also susceptible to illegal activities such as money laundering, and many more as has been discussed earlier in this paper.