Learn how blockchain technologies are reshaping finance and investments. Explore DLT applications and practical solutions for the real estate sector

02.11.2024
Hi-Tech Innovation

Digital Technologies of the 21st Century: Challenges and Solutions

Since the advent of blockchain technology, the world has placed high hopes on its ability to revolutionize traditional business models. In practice, however, the most prominent applications of blockchain have been cryptocurrencies. Their volatility, security flaws, and integration complexities have caused skepticism toward distributed ledger technology (DLT). Nonetheless, the potential of DLT extends far beyond cryptocurrencies. This article addresses the real issues hindering blockchain’s application in traditional financial processes and explores solutions to make it a valuable tool for the real estate sector, investment financing, and asset securitization.

Security Challenges: Blockchain as a Hacker’s Tool?

One of blockchain’s most touted advantages is its security. However, public blockchains like Ethereum have proven to be vulnerable. Open ledgers allow any participant to view all transactions, making them an attractive target for hackers. Smart contracts, a cornerstone of such blockchains, are both their strength and their Achilles’ heel.

For financial institutions that require high standards of confidentiality, private blockchains like Hyperledger and R3 Corda have become the preferred choice. These blockchains restrict data access to verified participants, ensuring a high level of security. This is especially important for banks, insurance companies, and investment funds that must protect client data and secure financial transactions.

Performance and Scalability: What’s Holding Blockchain Back?

Public blockchains face significant limitations in transaction processing speeds. For example, Bitcoin processes about seven transactions per second, whereas Visa handles up to 65,000. This makes public blockchains unsuitable for financial operations where instant processing is critical.

Private blockchains address this issue by limiting transaction processing to specific nodes, reducing network load and increasing efficiency. This makes such solutions more stable and adaptable for corporate use, especially for large financial institutions.

Regulatory Barriers: Why Cryptocurrencies Don’t Fit in Finance

One of the primary obstacles to DLT adoption in the financial sector is regulatory compliance. Public blockchains, with their decentralization and anonymity, do not align well with standards like KYC/AML (Know Your Customer/Anti-Money Laundering). Financial institutions must identify every participant in a transaction.

However, this is rapidly changing with the introduction of new standards. For instance, Luxembourg is implementing its fourth version of the Blockchain Law.

Private blockchains also provide solutions tailored to regulatory requirements. For example, digital bonds can be issued on blockchain platforms where participant identification is mandatory. This simplifies compliance and mitigates risks associated with cryptocurrencies.

Tokenization or Digitalization: What to Choose?

The real estate market is actively exploring tokenization to increase liquidity. However, tokenization is complex, requires stringent security measures, and adds costs to projects. In many cases, it is simpler to use asset digitalization based on DLT while retaining their traditional structure.

For instance, instead of creating tokens for every real estate transaction, blockchain can be used to maintain a property rights ledger. This approach simplifies recordkeeping, reduces risks, and enhances trust among market participants.

Practical Examples of DLT Applications

• Santander Bank uses the Ripple platform for international payments, integrating blockchain without creating tokens.
• Commerzbank digitized bond issuance using DLT while adhering to traditional financial standards.
• Propy applies blockchain to record real estate transactions, avoiding the need for tokenizing assets.

These examples demonstrate how blockchain can enhance transparency and automation while maintaining security and regulatory compliance.

The Future of Blockchain and Tokenization

Distributed ledger technologies can revolutionize the financial and investment sectors if used wisely. Private blockchains, asset digitalization, and selective tokenization are keys to effective DLT adoption. For the real estate sector, project financing, and asset securitization, blockchain can serve as a tool for transparency, security, and efficiency through immutable records and verification.

The widespread trend of tokenizing everything will gradually shift toward targeted tokenization, where it is necessary and practical. Asset digitalization in distributed ledgers will elevate project financing and real asset securitization to a new, widespread level.

Hi-Tech Innovation offers comprehensive services for legal tokenization, securitization, and asset digitalization within the regulated EU framework. Learn more on our website and harness the power of modern technologies today.

Complete turnkey services and full support for projects and startups in tokenization, securitization, and digitalization processes. Visit the Hi-Tech Innovation website.