The Unification of FinTech and PropTech | Denton
PropTech, a term derived from “property” and “technology”, is often associated with FinTech. In today’s world, properties are purchased every day, which inevitably involves financial transactions. A predominant part of real estate transactions require some form of technology and with FinTech experiencing massive growth in society, it has undoubtedly merged with PropTech to produce FinTech Real Estate. In this article, we will discuss some aspects of FinTech Real Estate focusing on peer-to-peer lending, crowdfunding, blockchain in real estate, smart contracts, and tokenization from a Mauritian law perspective.
Equals (P2P), lending can be described as a financial business activity that allows a person to lend funds through an online portal or an electronic platform that connects lenders and borrowers. Loans issued through P2P lending are usually unsecured. In Mauritius, P2P lending platforms use a separate account model as prescribed in the Financial Services (Peer-to-Peer Lending) Rules 2020. This requires the P2P operator to ensure, at all times, that lenders’ and borrowers’ funds are kept separate from its own funds, which will be kept in duly identified bank accounts in Mauritius. For context, the P2P operator is a legal entity issued with a P2P lending license by the Financial Services Commission (FSC) to operate a P2P lending platform. It should be noted that the funds requested from a P2P operator must be applied to finance a project. There is an obligation for the P2P operator to conduct due diligence on its lenders in accordance with the AML/CFT laws in force in Mauritius, as well as on its borrowers, and assess their creditworthiness before admission to the lending platform P2P. Interestingly, P2P operators in Mauritius are obliged to provide a cooling-off period of two working days to borrowers and lenders during which they can cancel their written agreements without any penalty.
An example of P2P lending in real estate is the provision of loans for real estate projects without having to go through the traditional lending process, thus reducing the intervention of intermediaries and additional documentation. Although there are licensed P2P operators in Mauritius who offer consumer loans, flexible loans and business loans, there is currently a gap in the market for P2P operators who offer home loans, as some obstacles will have to be overcome. overcome before it becomes a problem. reality.
Crowdfunding is the solicitation of funds from investors for a specific investment purpose through an online portal or electronic platform. Anyone operating a crowdfunding platform in Mauritius must be licensed by the FSC. Similar to the due diligence requirements imposed on P2P operators, crowdfunding operators must perform due diligence on each issuer, in addition to the due diligence conducted under AML/CFT legislation, before authorizing the issuer to raise funds via the crowdfunding platform. The issuer is the entity seeking funding through the crowdfunding platform. The same due diligence mechanism applies to the investor providing funding on the crowdfunding platform.
A hypothetical model of crowdfunding in the real estate sector is where investors can co-own with other investors through crowdfunding platforms. Investors can subscribe to shares of companies which in turn own the property. The company can then rent the property out to tenants, allowing investors to earn passive income from the monthly rental. There are functional real estate crowdfunding models, for example on some US-based technology platforms, where members can use the platform to invest in properties advertised by real estate companies. To date, no such platform has been created for the Mauritian market. Perhaps a significant part of its absence stems from control of the real estate market in Mauritius, particularly where foreign investors are involved. To acquire shares in companies holding freehold or leasehold real estate, non-citizens must obtain permission from the Prime Minister’s Office. Therefore, using the above-mentioned model, if a foreign investor were to buy shares of the company holding the property through the crowdfunding platform, he would be required to seek permission from the Prime Minister’s Office, a lengthy administrative process put in place. failure by the fast and transparent nature of crowdfunding operations.
Blockchain and real estate
The blockchain is a distributed digital ledger composed of “blocks” in which transactional data is stored and where the “blocks” are linked together to form a “chain”. The blockchain is immutable, which means that the data stored on it cannot be changed. As such, this technology is considered safe and reliable and has found its use in many applications over time.
Real estate transactions consist of multiple steps involving intermediaries, and it is currently a widely discussed topic whether blockchain can find a growing presence amid these transactions. Each real estate intermediary has a specific function which, in many jurisdictions, is mandated by law. One such example in Mauritius is the requirement for land purchase transactions to be carried out by a notary. Additionally, once a deed has been executed, it must then be registered in the Land Registry of the Registrar General’s Department. So can blockchain be integrated into these transactions? Currently, in Mauritius, this is not feasible as it would require more than a simple amendment of the existing legislation. Of course, opportunities exist as some of the most outstanding features of blockchain are its security, immutability, and efficiency, but there would be a massive nationwide or even global effort that would need to be implemented. Perhaps the most important consideration when buying a property is verifying the identity of the parties involved in securing ownership. There have been significant concerns regarding identification in blockchain technology which have resulted in robust AML/CFT measures. If real estate transactions were to become blockchain-based, identification issues would have to be addressed first.
Another application of blockchain is the integration of smart contracts when acquiring real estate. At present, there is an involvement of legal professionals who draft, review and advise their clients on certain contracts such as the prior reservation contract, any real estate agency contract or rental contracts. Smart contracts rely on the fulfillment of pre-determined conditions and are time and labor efficient. However, the shortcomings of these smart contracts are that they cannot replace a need for legal professionals to, among other things, negotiate between the parties, inform them of possible legal consequences or verify compliance with the conditions precedent.
On the other hand, one of the beneficial uses of the blockchain would potentially be the registration of deeds in the Land Registry. The blockchain, being itself a secure database, would be able to keep records of acts. This will create transparency on the ownership of real estate transactions recorded by the blockchain.
Another benefit of blockchain in real estate is tokenization of real estate assets. Real estate rights are fractionated and represented by digital tokens such that the tokens are respectively linked to an underlying fractional ownership. Transferring the token will also pass the associated entitlement. The benefits of tokenization include an increased pool of investors, transparent records, and the involvement of smart contracts reducing the need for intermediaries. This is currently not a practice in a country like Mauritius, all the more so for the reasons detailed earlier in this article relating to the control of the real estate market.
With an increasingly FinTech-oriented world, the real estate market is now a key player in FinTech. Blockchain, P2P lending and crowdfunding have certainly revolutionized real estate transactions and have already been incorporated into the real estate market in some jurisdictions. Embracing these advances would require regulation and changes to existing laws, but as virtual assets have found their way into multiple national legislations, there are certainly optimistic possibilities ahead.
- Financial Services Act 2007
- Financial Services (Crowdfunding) Rules 2021
- Non-Citizens (Property Restriction) Act 1975
- Financial Services (Peer-to-Peer Lending) Rules 2020
- “Legal Challenges and Opportunities of Blockchain Technology in the Real Estate Sector”, Rosa M. Garcia Teruel, Department of Private, Procedural and Tax Law, UNESCO Chair in Housing, Universitat Rovira i Virgili, Tarragona, Spain