Legal guide to real estate “tokenization” in France – How to structure such an operation?

Is it possible to “tokenize” real estate under French law?

This is the question many real estate players are asking themselves who are considering using a shared electronic registration device (DEEP or blockchain) to carry out real estate transactions. The objective sought is most often to democratize access to real estate investment as well as to simplify and secure transactions thanks to a transparent and presumed forgery-proof register.

The answers are not obvious since they are at the crossroads of several rights. In this article, we will provide some food for thought on this fascinating subject.

How to structure a real estate “tokenization” operation?

First of all, it is advisable to define what is generally understood by the concept of “tokenization” of real estate, especially since this concept is completely unknown to French law. “Tokenization” simply consists of representing the ownership of an asset in a blockchain.

However, French law expressly provides for the recognition of a property right over assets recorded in a blockchain only for minibons (this category of savings certificates allowing SMEs to finance themselves by resorting to public savings via platforms crowdfunding) and financial securities issued by joint-stock companies on condition that they are not admitted to the operations of a central securities depository (ie traded on a trading platform).

Thus, for the time being, France does not formally recognize the legal effect of registering the ownership of a real estate asset in a blockchain.

It could then be considered to include this real estate asset in the heritage of a joint-stock company and then to represent the shares of this company by means of a blockchain. The “tokenization” of real estate would therefore be assimilated to the “tokenization” of a joint-stock company that owns real estate.

The fact that the shares of a company are recorded in a blockchain implies respecting not only the Commercial Code, but also the regime specific to financial securities. Conversely, the legal framework specific to so-called “utility” tokens which governs public offerings of tokens (ICO) and Service Providers on Digital Assets (PSAN) is not applicable in this case.

In practice, this type of “tokenization” project commonly takes the form of a private placement or a public offering of financial securities for an amount less than 8 million euros with the filing of a Summary Information Document. (DIS) with the Autorité des marchés financiers (AMF).

Likewise, if it is in principle not possible, for legal reasons, to organize a real secondary market for financial securities recorded in a blockchain, certain alternative solutions can be explored.

This structuring is currently being considered within the framework of various innovative projects, aimed at facilitating the access of as many people as possible to real estate assets, for example from a heritage perspective.

👉 On the same subject – Crédit Suisse supports a startup in the tokenization of its actions

Can we pay the purchase price of a “tokenized” real estate in crypto-assets?

In the event that the company responsible for carrying the property holds crypto-assets, it may wish to proceed with this acquisition via payment in crypto-assets.

According to Me Antoine Cellard, notary in Paris:

“A single real estate sale in crypto-assets was regularized through a sale of shares (share deal) and not through a direct acquisition of the asset (asset deal). However, this completely new operation seems possible since it can be analyzed, under the empire of civil law, in a simple payment in kind. However, the acquisition of crypto-assets of a good tokenized or not inevitably comes up against certain obstacles. “

Indeed, the release of the price in crypto-assets could raise other more sensitive incidental questions:

(i) an intermediary should be used to ensure the transfer of crypto-assets from the buyer’s portfolio to that of the seller (by first implementing methods of verifying the ownership of the portfolios, for example via a “test Satoshi ”);

(ii) it would also be necessary to stop a value of the crypto-assets at a precise moment in order to avoid any risk of fluctuation of the price (by means of data aggregators such as CoinGecko and CoinMarketCap);

(iii) at the very least, part of the payment should be made in fiduciary currency to pay the regulated fees of the notary in charge of the operation and the registration fees;

(iv) attention should be paid to any unrealized capital gains realized on crypto-assets contributed as payment which could crystallize during the transaction;

(v) how to work with the reinforced urban pre-emption right in the event that the price is stipulated in crypto-assets? Or with that of a tenant benefiting from a right of pre-emption? ;

(vi) how to organize an action for injury which can occur several years after the acquisition even though the value of crypto-assets is very highly volatile? ;

(vii) lastly and above all, how can the notary fulfill his obligation to verify the traceability of funds with payment of the purchase price in crypto-assets?

Still according to Me Antoine Cellard: “We must not exclude that this type of question will become recurrent in the near future, as crypto-assets are adopted by the general public and as new stable crypto-assets develop (USDc , USDt, Dai, etc.), or even that a real digital euro be set up by means of a blockchain ”.

This article was co-written by Daniel Arroche, Stéphane Daniel and Margaux Frisque, lawyers at the Paris Bar. You will find other publications on legal issues surrounding the blockchain on Medium.

👉 On the same theme – Switzerland: 3 companies create a new tokenization tool based on Tezos (XTZ)

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About the author: Daniel Arroche

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Daniel Arroche is a lawyer at the Paris Bar. Since 2016, he has been supporting individuals and companies in their legal issues surrounding blockchain and crypto-assets.
All articles by Daniel Arroche.

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