BBW23 – Day 2 – Tokenizing Real World Assets: Real Estate

[Music] it's nice to meet you all nice to see some familiar faces uh for those of you I haven't met uh my name is David Conroy I'm the director of emerging technology at the National Association of Realtors so uh a kind of 100-year old organization uh very traditional business I get to work in the emerging Tech side of things so it's my job to look five 7 10 years out at any new technology that could potentially uh impact the real estate transaction and uh do deep Dives uh and because I had that opportunity I've actually been looking at crypto since about 2013 uh that's when I first got into mining Bitcoin so I know what you're thinking uh no I sold all those Bitcoin way too early uh otherwise I'd be up here in a nicer suit um but again I've been I've been researching uh applications for blockchain and real estate since about 2015 uh at one point I got so obsessed with it I actually quit my job at n uh and I moved to New York New York to work at consensus where I I tried to start a startup tokenizing uh some town homes in in Brooklyn um now since then you know a lot of things have changed we were very we were very early but I've always tried to stay uh up to speed on uh blockchain and crypto and real estate but uh I'm very glad to be joined here with Chris who is uh more in the day-to-day of of crypto and real estate uh so really thrilled to have the discussion thanks again for having us yeah thanks Dave uh hey everyone than for coming out uh so my name is Chris Leman I'm one of the co-founders at groma uh groma is a Boston based real estate and fintech Company uh our ultimate goal is to run and build a real estate-backed cryptocurrency obviously there are a lot of steps that have to happen along the way the world isn't actually there yet Network effects being kind of the primary one you can't actually have something that works as a currency without having millions honestly really hundreds of millions of users um but in the medium term we have a lot of other goals like expanding access to real estate estate wealth building through fractionalization of real estate assets on the blockchain so today we have a portfolio of around 200 million worth of real estate assets around the Boston area uh we have the actual individual properties denominated as nfts and then issue re shares as fundable erc20 tokens uh providing better transparency better access better liquidity um there there is obviously as you can probably guess some regulatory hurdles there both on the Securities side and on the housing policy side and we're working on a lot of that but the models built to work under the current regulatory regime and then scale and work with government as Government stances evolve on these things as well um I know we had a preall and we we've spoken a couple times before this I I actually wasn't aware of what you open your opening line there was you're actually looking to launch a currency that's right uh that's backed by real estate very very ambitious yeah so and I I can talk a little bit more about why we would want to do that right and there's a lot of different reasons lots of different answers for for why you might want to do that uh part of this is you know real estate is one of the largest asset classes in the world right residential real estate alone is 47 trillion in the United States it's hundreds of trillions worldwide um not only that something where their transaction costs in traditional systems are pretty high uh and this is obviously one of the big appeals of blockchain in general um so so it's something that should apply well to real estate but then more philosophically thinking about what occurred is how you would go about designing a currency if you had to do so from scratch from first principles you would want to think about what are the ultimate sources of value in society how do economies work what are the inputs to growth and development in an economy and really there aren't many things that work as well as real estate for that in the modern economy you could say energy you could say processing power but I could go on for a long time here but we've got a lot of other questions we can get to too yeah no it's uh it's great I feel like I know you a lot more already I thought we were being ambitious just trying to tokenize homes let all launch whole currency uh I guess for the benefit of the audience who might not follow this stuff day-to-day can you give us just uh like a rundown on the current state of tokenizing real world world assets like real estate on blockchain like where are we at today yeah absolutely so there's a lot of different projects going on right now both in the public and private sectors uh in the private sector obviously gromo which we'll talk some more about um some other examples roofstock onchain is a sub project of roof stock which you may be familiar with it's a uh you know Investment Company for investment in the single family rental space making it easier to trade in those assets which have obviously been very popular over the last decade maybe not quite decade and a half um and so the onchain project enables people to do so with nfts as the actual denotation of that asset um other ones centrifuge uh is a platform that a lot of you may be familiar with in the blockchain space using real estate assets on chain allowing lending uh based off of that and so uh you know real estate works really well as a source of collat collateral and for yield on the debt that cuge issues uh public sector obviously Lugano is doing some work on this uh the the bank of England is investigating the use of blockchain to eliminate the need for escro and real estate transactions there's some work going on here in Massachusetts I don't know if you've seen the speeches from rep Kate lier gidi and Josh Cutler who are working on deed registry legislation there are also some projects going on at the county level on that um and then yeah groma of course has has its own plans yeah um the National Association of Realtors also has an investment arm called second centory Ventures and back in 27 2018 we made some blockchain plays as well uh you might have heard of propy before they were like one of the the first companies that did uh nft sales for for Real Estate asses in Florida last year um but like you said there there's a lot of people working on this public private uh I have a lot of crypto zealots telling me like this is going to totally change the the real estate industry um but everything just seems in real estate and in crypto both markets both things seem so unpredictable like do you think that uh this is going to lead to major issues if the unpredictability of crypto meets that the housing market or housing bubbles like how why is it a good idea to combine these two things yeah definitely no and you know worth noting that there are you know independent sources of volatility in both crypto and in real estate right obvious we've seen the 2008 crisis in real estate we saw the pandemic in real estate both of those hugely disrup disruptive uh you know crypto honestly has a has an issue with volatility in terms of its overall brand um but it's worth thinking about what are the sources of that volatility right and with a lot of I think more traditional crypto assets that aren't backed by hard well understood assets a lot of the volatility just comes from an inability to effectively and rigorously model what should a Bitcoin be worth what should eth uh be worth there's just just not an established way to do that people have all kinds of charistics that they kind of rely on but they're not well agreed upon there's lots of variation there's lots of regulatory risk uh and so if you're dealing then with crypto assets that are backed by real world assets like real estate you wouldn't necessarily expect there to be enduring volatility just by the virtue of uh it being denominated on blockchain as well I've got uh more doomsday questions we'll save those for later though um so I've got more questions about trust and smart contracts and how automation is going to work but before we get to those I think it would be good if you explain just exactly kind of how gromma works so when I'm asking you these questions they've got some context so yeah what is goma's business model today what's on chain today y like how close are we to actually having Assets in Boston you know where you can look up on ether scan like right where are we there right definitely so so so currently you can actually look at our assets on chain so so as I said grow has a portfolio of uh 50ish properties around Boston total value of around 200 million at this point uh you can go on our website you can look at different properties different funds and see the actual ethereum architecture that's behind them but I guess that's a narrow answer to one of your questions I think more more broadly talking about goma's business path and how we want to make sure that the business is scalable at each point right now we're basically a real estate company we we we have a lot going on in the background working on the blockchain Solutions working on the regulatory approval um but the the day-to-day of the company right now is really very similar to what you'd expect from a traditional real estate company both on the investment and the property management side so would it be fair to say that that you know traditional real estate business is almost like subsidizing the R&D to get where you want to go yeah that's a reasonable characterization it well so so depending on how you look at it right there are multiple companies that fall under the gromma ecosystem so it's kind of a propco opco model right and so the the propco the Reit does doesn't actually pay for any of our software Engineers for you know our design and branding team those are really come from the pure startup model right VC dollars money from some of our Founders right those are what are actually paying for our long-term R&D so that it doesn't eat into the actual performance of the assets got it so you said you got 50 properties about 200 million or so all around Boston it's in a tokenized re that is on chain yes and that uh can anyone get access to this or there to be a certain level investor where are you at with the uh you know the reg D reg CF right definitely yeah so so a few comments on that so one just making it clear what is going on in terms of both the blockchain assets and the actual Securities we essentially have parallel systems both for the individual properties and for the Securities that represent re shares so we have you know for a given Triple Decker in our portfolio which is most of the actual assets uh we we have the deed registered with the normal deed registry in suffet county or whichever other County the properties in and then in parallel we have an nft representing that similarly for the Reit we have the re shares that are you know recorded and stored with the transfer agent and we also have the erc20 tokens that are parallel to those transfer agent records so long term we we would love for the blockchain to serve as the actual legal source of Truth we're obviously not there yet in terms of where the SEC is um but we we'd like to move towards that eventually and then the uh sorry was the other part of the question um I I was just trying to you know get everyone up to speed on like where exactly are we with real estate assets on chain um you mentioned you've got uh you're doing just double entry for now you're doing traditional real estate reporters of deeds and then you're also uh trying to you know essentially establish standards for how this would be done on chain um you mentioned that you've got ERC 20s and you've got nfts like uh how does that actually get you access to the value of the property oh right uh I remember the other part of the question now it's the regulatory side of things right and who's actually allowed to buy these things so we're going through the full normal Securities process right so as of May we entered into reg uh reg d506 C which enables us to do General solicitation only for accredited investors so we've been in that for a while we actually raised most of our money prior to that just through general you know back Channel networking but we expect at some point this fall to be under reg CF which enables us to raise money from anyone um so so that you know still has a a cap of 5 million annually in terms of fundraising uh we would then transfer from per asset sorry would that be per asset that you fund ra uh so so no uh we we would be fundraising for the Reit in general so all this is referring to the Reit as a pool and so as money comes in we use it uh you know based on our judgment to acquire individual assets we would then transition from uh reg CF to Reg A+ which boosts the limit up to 75 million annually and then eventually an S11 which is basically being fully public in terms of our ability to raise uh money though of course there's increasing levels of regulatory Audits and approval for each of those successive stages so uh full transparency that's kind of what killed my uh blockchain startup in 2018 right uh the uh regulatory uncertainty it was it was so the M the waters were so muddy we didn't know if we needed a broker dealer license we didn't know if we needed a money transmitter license we uh we had all of these assets that we were tokenizing that I if I were on a stage like this back then I couldn't even talk about them because of all the the regulatory issues so it's it's good to hear that that's getting a little bit easier well I wouldn't say it's getting easier we we we we think we're going um but but but we have had to spend a lot of time and money to do it uh both because just the basic systems leaving crypto out of it are pretty uh High barriers to entry in terms of the amount of time and money you need to spend getting these approvals and then especially when you're talking with the SEC and you're going through that review process if the word blockchain's in there they're going to have a lot more questions and you know we're very good at answering the questions and they haven't had a negative stance they just you know for the reasons that we're probably all aware of have really uh high level of nervousness with any of these things and so we've done a good job talking with them about this you know we we have a council externally who used to be fairly high up at the SEC so we can do this but you know unfortunately it takes a lot of money and without the kind of financial backing that we have as a startup it would probably be prohibitively expensive and you say the the investors and grow marketers comfortable with that risk versus just wanting a more standard return from a traditional real estate business uh correct and so again you know there's two different types of investors right there's read investors who want kind of the stable income and steady appreciation of real estate and then there's also startup investors right VCS who want you know who have the appetite for higher risk essentially and that would be in groma as opposed to exactly gromma Corp versus groma Reit so uh one of the things that really attracted me to blockchain and crypto was was smart contracts like uh going back to 2015 I was uh creating erc20 tokens with you know my street address on it and fractionalizing them and trading them and I thought wow this could impact the real estate transaction itself so much if we were able to automate and log and record all of these things on chain U I've heard that you're using uh you know token contracts uh are there any uh other smart contract uses that grow at is currently using or have have planning so so so yeah currently no but in the near future uh what we think one of the killer apps for the actual groma Reit tokens which we call groma coins uh is going to be what we call the liquid mortgage which is basically a way for uh renters to build wealth gradually in real estate Equity without having to spend additional money on top of their typical rent payments and I I I can go in detail on how this would work but basically you know this is not only a way that we can grow our ecosystem and scale the company but it's a way to address via Financial Innovation some of the problems that you know we're probably all familiar with in terms of how housing works today right people being priced out of home ownership people being faced with increasing rents that cut into their uh standard of living there there's a lot of problems on the housing and land use policy level that have created these problems and you know while we do advocacy and that's a lot of my job on trying to reform housing policy itself we also want to work on our own to develop Solutions make it easier for people to build incremental wealth there uh Chris it's it's a good thing that Justin put the two of us on stage together because when it comes to advocacy that's like one of the main things the National Association of Realtors does like the reason you can use doc sign to buy a home today is because n ARS work on on the hill so we should maybe talk more after this you know probably yeah all right so um liquid morgage can you uh we we talked about that just for a second there U when I hear that term I think like all right is this something that I've staked somewhere that I can get you know um yield on it somewhere else is this some type of streaming payment system what is a liquid mortgage yeah good question so so so it does involve effectively staking um B basically the way it would work is suppose you're a renter suppose you're paying let's say $22,000 a month on rent instead of taking that $2,000 and giving it directly to your landlord in exchange for living space take the $2,000 purchase $2,000 worth of groma coins the re share you now own those read shares but you haven't paid for your rent yet okay so what you would then do is borrow either from groma or more likely from one of our external lending Partners an equivalent amount of money $2,000 uh secured against your new asset that you own use that to pay your landlord so at this point you have an asset worth $2,000 the groa coin and you have $22,000 worth of debt because you've had to take out a loan to pay your landlord yeah you're at Net Zero but over the course of the next month three things will happen one of course you have interest that you have to pay on that debt but on the other hand you have dividends that are being paid out by the gomar re based off of the rental income produced by those properties and you have appreciation of the underlying assets and so even if it's just a property or rented sorry even if it's just a property or rented uh well so so it would not have to be the property your renting this is something that would definitely be available for renters at gromma properties but you could live you know California where gromma currently doesn't own anything and be a renter and still engage in the same program owning fractional shares of income generating Residential Properties in the Boston area and so over time and and we we've done the math on this we've done the historical research the vast majority of time the sum of the expected dividends and appreciation and obviously there are no guarantees there's variability Etc but the vast majority of the time the dividends and the appreciation together significantly outweigh the interest so so you're actually building net worth in real estate assets without having to cut into your existing spending whether it's on rent Food Insurance any of your other expenses uh which overtime can be a really powerful tool for renters who have found it hard to say save up for a down payment gotcha so liquid mortgage is more of like the the crypto definition of liquid as opposed to an asset that's easily sellable uh so you would it's honestly both right because you would own gromer reach shares which while you know again we're not in reg CF yet they aren't really fully liquid they they will eventually be exchange tradable and so conceivably at any point you know let's say you've done it for a few years you you've built up a net profit of let's call it $10,000 um and you have pretty significant gross equity and gross debts you can take the assets that you built out and cash out at any point right so it's liquid in both senses gotta wow um bit of a mind-bending conversation there it's easier when I have slides and images to go along with it which uh we'll be releasing soon Back to Basics for a second uh what other smart contract uses should there be uh or have you seen in real estate i' I'm uh shocked that we haven't seen like a way for somebody to just put down their escrow payment with with a crypto or pay the rent with crypto like why why doesn't that exist would you accept crypto for rent in one of your 50 properties we we probably would I mean you know just because of how our model works and because of what we would have to do with that money we would probably have to convert it into dollars or convert it into something like usdc pretty quickly uh be because the money has to then be funneled into you know repairs maintenance Acquisitions all these other things that you know the the payment infrastructure for actual crypto doesn't exist yet we're pushing for that to to happen and you know we've talked with people at Circle talked with people at Fidelity about ways that the system could eventually evolve over time to accommodate that but yeah we we we we could definitely do uh you know accepting payments in circle uh in usdc and then convert it into actual dollars um what else now I mean again another thing that really got me into blockchain early on was just like the the composability right so great you've uh represented uh a real world asset on chain now there should be some pretty incredible Financial tools you can do with that in addition to the liquid mortgage U what other smart contract based uh drivers you think will come from U actually being able to represent a house on you yeah so I mean conceivably there there are all kinds different things you could do here and a lot of it will really depend on the government agencies that deal with the real estate industry right there there are all kinds of bottlenecks that limit the rate at which these transactions can happen that impose additional costs which in turn decreases the efficiency of the market as a whole and so a lot of these things are gated by various parts of government that you know as we know tend to be a bit slower to adopt thing obviously there's variation we've seen you know in previous panels people are we inly stages and we' [Music] toov there that makes things lower transaction cost more liquid resulting in more efficient asset allocation right so do you see a world where in the future like instead of uh home sale listings going on to something like an MLs all of a sudden it's some like nft marketplace where homes are being traded in a decentralized manner without a uh real estate professional in the middle you you absolutely could but you know that's not to say that there there wouldn't be opportunities for people who have that deep knowledge of the real estate economy to take advantage of that Dynamic right it might be in a somewhat different role but you know I'm sure people like you and other people who are forward looking in that industry would have the opportunity to build businesses around driving people towards more efficient trading patterns and uh you know other businesses built on top of that platform gotcha so our uh 1.5 million Realtors were were safe still yeah wonderful um let's let's pull on that thread a little bit more though right so in in a world where homes are uh you're able to list them for low fee trade them uh uh you know in seconds instead of weeks uh who are the who are the real winners there and who are the real losers there in in that world yeah good good question so I mean for for sure no question a huge winner are just the people who actually live in these assets right a big theme we're working on at gromma and kind of a key concept behind the idea of the liquid mortgage is the idea that there's no real logical necessity that the house that you live in has to also be a house that you own uh you know that's typically how it works and a lot of that has been because information transmiss has been really inefficient up until the past few decades but you know conceivably you might want to live let's say in you know somewhere in Cape Cod right you love it there you you love the quality of life you love the ocean Etc but you really really don't necessarily believe in the appreciation and you know the investment quality of a house in Cape Cod you'd rather invest in say Miami or you know maybe somewhere outside of the United States conceivably you you could own Assets in places where you expect the financial performance over time to be optimal and then use some of the proceeds from that to cover the cost of your living space in the place where you actually prefer the quality of life or you know proximity to jobs Etc so so so that's one big winner right the people who actually consume housing um and then thinking more about the people who are in the industry right and who are making profits off of these transactions and adding value along the way I think there's a real parallel here to be made with the the rise of software in general in the you know later Decades of the 20th century right lots of people thought that the introduction of programs like Microsoft Excel or other types of financial databases would you know be a blood bath for bookkeepers right you you know people can do these things much more efficient L and so you need way fewer of those people to actually handle all of that work um whereas in reality we saw the opposite happened right because the cost of those kinds of services was decreased so much by the introduction of these Technologies the actual demand for those Services massively increased right and and the different places in the economy where those Services became viable grew so much that we have way more people like that today and right and you know the the US economy and you know economies and you know other parts of the developed World other even the developing world have seen massive growth in that Financial Services sector about 2 minutes left here um so I generally agree with the everything everything you said and where where this is going um but who who should be leading the way right is it traditional organizations like uh n is it uh young Scrappy startups is it innovators is it disruptors it I feel kind of feel like you need both sides to be at the table if this is going to work like how do you make sure those incentives are aligned and know how do we get from Zer to one I mean you might argue that you're already at one but we're not quite there yet no no you're totally right that it's not either or it's definitely both you know you don't want to be prescriptive you don't want to say you know hey it should look like this and nobody's smart enough or has the enough data to actually predict that confidently and if you tried to you would end up you know cutting out viable ways to do things um so yeah there's tons of innovation that comes from the flexibility of startups but you know startups like groma are are constantly looking for larger institutional partners that can you know rapid you know scale up our growth more quickly and that are you know smart enough and you know not too hidebound such that they can adopt these Technologies and apply them on a much larger scale so both is absolutely the answer there uh one final question and then maybe I'll sneak in at doomsday question after that um what's the biggest blockers right now biggest blockers right now uh for for for groma or for real estate in general uh for the advancement of real estate uh technology in terms actions and uh getting more uh real estate assets um recognized on chain or represented on chain yeah yeah I mean really we just need laws to change uh you know both at the state and local level but also obviously at the federal level right you know the the the SEC um as a whole though obviously there are individual Commissioners who who differ from this um has been pretty hostile and skeptical towards crypto in general and there are other people in the federal government who who are share that stance there are also great Advocates uh you know jakeob talking Claus from ma Tom emmer from Minnesota uh there are people and there's momentum Hester Pur obviously on the SDC to change these rules but it's going to take really consistent pressure and making it clear to these policy makers that there is a constituency that these things aren't just you know abstractions and toys for Tech nerds um they're things that can actually make real difference for everyday Americans and everyday people around the world nice all that that that's it for time does anyone have any questions in the audience go ahead sir oh the one doomsday thing uh when I think about in the future say there's thousands of homes in Boston represented on chain and available for auction is that someone just coming in with the sophisticated tools like uh flash loans uh you know borrowing hundreds of million dollars in seconds as long as you can pay it back the end of it and just tanking entire markets like I'm not sure exposing the real estate industry to these shadowy super quers uh won't have some negative side effects right yeah you you you always have to be on the watch for that kind of thing but at the same time you do scenario planning for that at groma like what happens uh we we we do we we we have annual War gaming uh that that I host and we come up with all kinds of scenarios right both on the on the crypto and the tech side hackers Etc also on the policy threat side environmental threats all all kinds of things I mean what one fortunate element of doing this in the real estate industry is the total volume of of asset value is large enough that you would really need an enormous amount of of coordinated effort to try to do that and so doesn't mean it's something that's not worth thinking about and being prepared for but it it's not something that is plausible in the near future easier to steal an nft than an actual physical building for sure uh question are we done we're done all right thank you so much everybody you can catch up back yeah [Applause] thanks